Capital Ideas: A Shot in the Arm
We have all increased our threshold for the inconceivable.
It’s only the end of January and we have already experienced armed riots on the Capitol, the demise of the famous “21” restaurant, a record breaking 22 executive orders signed by President Biden in his first week in office, the death of Larry King and Hank Aaron, and Tom Brady returning to the Super Bowl.
We have also witnessed one of the greatest short squeezes of all time in GameStop stock. A short squeeze is a rapid increase in the price of a stock owing primarily to technical factors in the market, rather than underlying fundamentals. A short squeeze can occur when there is a lack of supply and an excess of demand for a stock due to short sellers covering their positions.
The Federal Reserve has pledged to keep short term interest rates low indefinitely and has continued to purchase $120 billion of securities in the marketplace, monthly. Pile this onto an upcoming Biden stimulus plan, and it could mean a potential boost for the stock market. Some may say that equities are fully priced, but who can accurately predict the impact of approximately $2 trillion dollars of government stimulus?
We are concerned that the funding for infrastructure, education, and capital improvements may not be sufficient to drive the economy forward. If too much of the stimulus is just consumer driven, the effect might be counterproductive in the long term. The tension between these two narratives may cause increased volatility in the markets, and given this backdrop, we feel that investors should stay diversified and remember to inform us of any changes in their financial circumstances which might lead us to adjust their investment risk profile.
The new Administration is likely to seek higher corporate, estate, and individual tax rates. The impact is difficult to assess, however, it might be tempered by all of the additional liquidity in the economy. Nevertheless, with the deficits that are being created, it will be difficult not to rationalize raising taxes – especially on upper income families and families of wealth who have benefited from the appreciation of their financial assets.
I have written this before, however it is worth repeating. Protecting portfolios from inflation or deflation is an important goal. In this environment, it is difficult to determine if either might occur but wee are determined to provide good outcomes, no matter what occurs.
With the vaccine rollout having been less than stellar, we hope that President Biden can deliver on the 100 million vaccines in the first 100 days as promised. The sooner we each receive the shots in the arm, the better off we will be.
Our portfolios generally performed well last year, and we are grateful to our staff who directed the allocation, analysis, and execution of our planning. We are most grateful to our clients who entrust their resources to us and allow us the ability to perform our craft.
We thank you for your continued confidence and look forward to a productive year.
The challenges ahead remind me of Albert Einstein’s quote “Life is like riding a bicycle. To keep your balance, you must keep moving”.
We are moving ahead with realism and optimism. The best is yet to be!
Stay well — stay safe.
Seymour W. Zises