Roaring Twenties? Really?

We have come a long way since this time last year. Anecdotally, there are many signs of recovery. But at the same time, there are many people out there who are struggling. When I think about 2020, it seems like a fevered nightmare. We all had so much anxiety about so many things. But we aren’t in 2020 anymore. We’re in 2021. While many problems remain, I believe there are good times ahead.

Some look to characterize today as another Roaring Twenties, similar to the boom times of 100 years ago. While there may be historical rhymes, I don’t think this is a very helpful comparison. The 1920s followed a decade of unthinkable suffering (WWI, Influenza epidemic) and were in turn followed by the crash of 1929 and the Great Depression and Dust Bowl of the 1930s. Any inference that another crash and Depression lie ahead seems inaccurate and manipulative to the point of cynicism. But is there a kernel of truth in these warnings? Are we in a calm before the storm? Or alternatively are we entering a new growth super cycle in which the good times are gonna roll? Or is our future going to be something more complicated and varied: a mixed and uneven basket of outcomes with many winners and some clear losers?

A year ago, as the markets were starting to rebound from their March lows and the economy still looked awful, there was a great deal of talk about the potential shape of the recovery. Journalists, analysts, and academics competed to pick the letter that best illustrated the potential recovery: would it be V-shaped, U-shaped, or an L, or a W? Or would it be a square root sign? Or a K? I saw a journalist write about whether it was going to be an upper vs lower case K.

Darn, that schtick got annoying. No single letter seemed a helpful enough rule of thumb. For me, the word that served as the best starting point in gathering my thoughts is: uneven. The impact of the pandemic has been very uneven. If you look at health outcomes, business sector activity, investment performance, or socio-political narratives, you see there’s no single storyline that describes it all. And the recovery is proving to be very uneven as well.
What conclusions might we draw from all of this? In the midst of this unevenness, I remain cautiously optimistic about the times ahead. And I’m a bit more optimistic than cautious. Let me explain.

Optimism
There are many signs of good news all around. Here are some elements that make me optimistic:

• Big Time Stimulus. A ton of fiscal and monetary stimulus have already been injected into the economy. There is more on the way. A lot more. The unintended consequences of all this stimulus will be fodder for comedians and politicians. But I wouldn’t bet against their overall impact.
• Public Health. Over two hundred million Americans are now vaccinated with a minute percentage of adverse reactions. Increasing vaccinations will continue to improve the ability of businesses and institutions to fully reopen.
• Economic Output. Quarterly and annualized GDP number are high, as high as one could reasonably hope for.
• Employment. Trends in unemployment, weekly jobless claims, help wanted, etc. all point to a recovering job market.
• Corporate Earnings. Q1 2021 earnings for S&P 500 companies beat estimates. Q2 earnings look to be strong as well.
• Travel & Leisure. Judging by airline traffic and the rise in ticket prices, domestic travel looks to be picking up. Spring break seems to be booming as many Americans look to escape their pandemic-induced cabin fever.
• Housing. There is a well-reported surge in residential housing prices in many communities throughout the US. Shifts in demand are coming up against shortages of inventory which leads to great opportunity or headache, depending upon where you live and whether you’re a buyer or seller. In all, there’s a lot of money being made and spent in this important sector.
• Stocks. The dispassionate stock market reflects the general sense of optimism. The market, often seen as a leading indicator of the economy’s future, seems to be predicting continued and broadening recovery.

Caution
But alongside all of this good news, there are many reasons for caution. We are in a period of historic upheaval. As we emerge from a year of social, economic, and political chaos, the progress doesn’t always look smooth. Here are some clear reasons for caution:

• Persistence of COVID. Though over half of adult Americans have now received at least one shot, the infection rates are trending up. Blame politics, variants, Darwinism, whatever. Upward infection trends are concerning for sure.
• Speculative Fervor. Casino-like frenzy is occurring in pockets of the economy where intangible and unjustifiable (even farcical) assets are being driven to awesome highs. Some of the success stories of today seem destined to become the punchlines of tomorrow’s cautionary tales. We shake our heads scornfully about the Dutch tulip mania of the 17th century or the silliest IPOs of the dot-com bust. What will future historians make of the meme investors of today? When people ignore risk, they are quite often punished, eventually.
• Pockets of Malaise. Many geographies and demographic groups continue to struggle greatly. They were hit hard by the pandemic shutdown and aren’t seeing much recovery. Targeted stimulus policies are designed to help many of these groups, but will the help be enough and will it be accepted given sociopolitical beliefs and biases?
• Business Travel. Recovery in the travel sector can only go so far if it lacks the participation of the business traveler on a corporate expense account. Much of the resurgence in this sector has been related to leisure. Whether corporate travel recovers to previous levels or is permanently replaced/reduced by video conferencing will take months or years to play out.
• Continued Social Unrest and Community Violence. It’s hard to reconcile economic recovery with the apparent unrest we see in so many cities. And violent crime is resurgent in many if not most US cities. Some unrest is about politics. Some is about perceptions of injustice. Stability will be greatly enhanced if recovery can lift up angry and traumatized people and give them the space to support their families and to heal.

Conclusions for Investors
Again, I am cautiously optimistic about the prospects for stock investors. When you think about it, cautiously optimistic is usually just the right way for an investor to approach the future. There are people in the country who are greatly cynical right now and expect doom. Others seem to have forgotten risk altogether and think assets will go up forever. Of course, neither is likely correct.

In dramatic and hysterical times, it will probably benefit investors to try and ignore the hype and vitriol. Though there will forever be new lessons to learn as our world continues to evolve, I think we do well to remember foundational wisdom. A well-balanced, well-diversified allocation of quality investments should perform well if given time. You might not get rich quickly with this approach, but then again, you might stay rich for longer if you follow sound fundamentals.

Remember, politicians on cable news talk shows are not your friends; they are seeking advantage by speaking to their base of voters. Ignore them, as they are more distracting than informative. Patience, deliberateness, and durability of wealth seem more my speed.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk including loss of principal.