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What Next?

March 2020 had one of the fastest market declines followed by one of the quickest recoveries in history.  The market came roaring back during 2020 due to the pandemic driven market where technology and consumer discretionary companies - Facebook, Apple, Netflix, Google, Amazon, Zoom, GrubHub, Uber Eats - all benefited.  

Over a few months, necessity quickly accelerated the adoption of working from home and distance learning, as virtual meetings and gatherings became the new normal.  The adaptation to digitization has globally changed everyday life for education, corporations, and the workforce.  Change is not easy to digest.  Forced to accept a new way to conduct business, change can be impactful and possibly disruptive.  

As the economy shut down, consumers changed habits.  We stayed at home and put more into savings.  The U.S. savings rate has gone from a long-term average of 6.5% of disposable income to 7.2% pre-COVID to 12.9% as of November 2020. 

Covid-19 has caused supply chain disruptions across the globe due to factory shutdowns and laid off workers.  A surge from consumer spending has caused prices to rise temporarily due to goods being in short supply, which can cause inflation, but the question remains whether the surge will be sustained.  It may take a few quarters to bring workers back and increase inventories.  According to market strategists and portfolio managers, inflation may be only temporary due to supply shortages across many industries and slowdowns caused by the virus.  Some of the recovery related issues are present in housing where lumber and materials are in short supply, causing delays in new construction.  

If 2021’s first quarter is any indication, investors are anticipating an end in sight as they shrugged off a 10% decline in technology stocks that led the markets in 2020.  The good news is that the unemployment rate dropped from 6.2% to 6%.  However, we still have a long way to go to get back to lower unemployment numbers and get the economy growing again.  According to data from the International Monetary Fund (IMF) the world is turning the corner toward recovery.  The U.S. is projected to have real GDP growth of 3.1% in 2021 compared to a negative GDP of 4.3% in 2020.  Eurozone is projected to see real GDP growth of 5.2% in 2021, up from -8.3% in 2020 and the emerging markets are projected to have real growth in 2021 of 6%, up from a negative 3.3%.  The low interest rate environment and the stimulus packages have set the conditions for recovery.  There are many headwinds regarding inflation, the bond market, high valuations in the equity market, interest rates rising, an increase in corporate tax rates, higher taxes for individuals earning over $400,000 and Covid-19.  Investors may think a new storm is brewing in 2021.  Our view is more optimistic with the world reopening.  

Europe and the emerging markets are poised to grow at a faster pace during 2021 than the U.S.  We implemented this shift in May 2020 to position portfolios for post-Covid-19 without abandoning the U.S. markets, where we think opportunities exist as we shift to more cyclical companies in energy, financials, and leisure.  Over the past year we have taken profits from areas that have increased in value. We have added to domestic and international to take advantage of current valuations and opportunities. 

Covid-19 will have some lasting effects for many businesses, with changes that may be permanent.  Business travel will be impacted by the shift to digital and some businesses will see cost reductions in office space leasing.  A recent survey asked loyal cruise customers whether they would book a cruise in the future and 74% said yes and 24% were unsure.   This is one example that consumers are ready to resume their normal habits and the cruise travel industry is not dead.  There is a tremendous amount of cash on the sideline given the savings rate increase we have seen over the last year.  

Even with the rollout of vaccines we know that Covid-19 still exists.  Some are beginning to feel like it is behind us and we are on the road to recovery as restrictions are loosened.  As we move through 2021 the question will be who or what will win the race:  the variants or vaccinations over the months ahead.  The key is how quickly we reach herd immunity and what ripple effects Covid-19 has throughout our economies.  We can only hope that we beat the variants and can begin to resume our new normal.  

Investors have priced in a recovery, but it remains to be seen to what extent and what time frame.  Unmet expectations are generally the thorns in investors’ sides because they cause us to react rather than reason.  Volatility could increase if investor expectations are not met.  

It feels like a bright star is shining rather than a storm brewing, given that the most recent stimulus has yet to be infused into the economy.  In addition, pent-up demand by consumers has yet to be felt by many industries. The consumer has always dictated when an economy grows by way of their spending habits.  The consumer is alive and well.  Diversification will get you to where you want to be.  

Keep an eye on diversification.  If you focus on one sector or one theme as headlined, you may miss out on other opportunities.  For example:  The 50-year bull market in bonds has ended with interest rates near zero.  Does that mean you should abandon your bond allocation?  Of course not.  Investors need to understand that the bond market will reset over the next few years as interest rates rise.  Although bonds in general may be an anchor (a drag) on your portfolio, they will still provide stability in a diversified portfolio.  

Diversification within our portfolios plays an even more important role as we go through various stages of recovery.  Investors today need to be more tactical in their approach, so they balance out their risk and take advantage of opportunities.  We all look through different lenses when it comes to investing.  However, what we see or think is not always the outcome.  We therefore should maintain a well-diversified portfolio.  

We are grateful to you for you allowing us the opportunity to guide you through this pandemic.  We look forward to the time we can again meet in person.  If you have any questions or concerns, please let us know.  Enjoy spring and stay healthy.  We are on the road to recovery.  

Thomas L. Menzel, CFP®                                             Laura Biermann, CFP®
President                                                                       Vice President

IMPORTANT DISCLOSURES:  The opinions presented in this communication are subject to change without notice and no representation is made concerning actual future performance of the markets or economy.  Information obtained from sources is considered reliable but is not verified.  The research and other information provided herein speak only as of its date.  We have not undertaken and will not undertake any duty to update the research or information or otherwise advise you of changes in the research or information.  Performance information presented is not an indication of future results and index data is provided for market reference purposes only.  This is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy.  This document is the property of Legacy Financial Advisors and is intended solely for the use of the Legacy client, individual, or entity to which is addressed.  This document may not be reproduced in any manner or re-distributed by any means to any person without the express consent of Legacy.  This material is for educational purposes only.  Mis-transmission is not intended to waive confidentiality or privilege.

[1] Sources: Bureau of Economic Analysis, Refinitiv DataStream. Long-term average is from 1990-2019. Pre-COVID is as of 12/31/19. Current is as of 11/30/20.  

[2] Source: Cruise Critic. Survey responses were collected June 15-22 from 2,897 Cruise Critic readers, a group which typically includes experienced cruise customers.