The airwaves are abuzz with talk about the impending stimulus package. The consensus view is that it’s not a matter of if we’ll get another round of stimulus, but when and how much. However, the longer the stimulus is delayed, the less necessary $1.9 trillion seems to be. This is partly due to a different stimulus few people are willing to talk about.
Reopening the economy will have a greater impact than any legislation the government can pass. We get closer to this reality as more people get vaccinated. Case loads are down significantly. JP Morgan estimates the US will have 40% of the population with some form of immunity by the end of March and 80% by July.
Admittedly, this is a rosy outlook, but a year ago, we were told the world was burning to the ground. Vaccines within a year? You’re dreaming. Cynics and pessimists sound smarter than optimists because the human brain is wired to respond to threats. Turn on the TV or doomscroll social media and you’ll find plenty of disaster fantasy dressed up as serious analysis.
The reality is that innovation is not only alive, but thriving. Medical advances are rapidly developing in ways that benefit human society not just in some far-off tomorrow, but TODAY.
Regarding politics, the investment horizon for our client portfolios is longer than the typical American political regime. Diversification, rebalancing, and tax loss harvesting remove the need to guess which way the political wind will blow next. One of our clients is an avid boater and I’ll always remember a comment he made: “Never change your plans based on the weather forecast. Change them based on the weather.” That’s not to say we ignore politics. We just pay more attention to the legislation that passes than what the politicians say on the way to passing it.
We are keeping an eye on one very real threat: inflation. There seem to be two camps on inflation. Economists are worried about rising money supply (M2) and expanding inflation breakevens. Bond managers see the recent movements as reflation more than inflation. A year ago, the pandemic dropped inflation expectations into the basement. As they resume their pre-pandemic levels, the Federal Reserve’s zero interest rate policy is holding short-term interest rates down, exaggerating the breakeven spread.
We’re not convinced that either camp is completely correct, but we’re monitoring inflation more closely today. For inflation to rise and remain above 3% (remember the Fed’s target is 2% average inflation), wage growth would also need to take off. There is still tremendous slack in employment. Few workers are returning from their pandemic furlough asking for an immediate raise.