Equity markets fluctuated this week, with earnings providing no clear guidance and worse employment figures continuing to role in. Unemployment claims rose by an additional 3 million people, bringing the total to over 33 million workers out of jobs since the crisis began. Innovations in battling the virus continue to evolve rapidly with more testing and vaccination promises making developments each day, all while the world re-emerges from lockdown. Meanwhile oil remains volatile, with the best week on record as prices climbed, up more than 30% as investors weigh increasing demand from a reopening world economy. Boosting positive sentiment, additional stimulus measures appear to be making their way through Congress, with a focus on state and local governments who will likely to be overly impacted by the current crisis. The S&P 500 is hovering around the 2,900 level, leaving many wondering if valuations are stretched without any understanding of what earnings will be in the coming quarters and years.
Longer term concerns over how the record amounts of stimulus efforts will be paid for are starting to emerge, with trillions of additional dollars in borrowing slated for this year alone. Many investors are now questioning whether higher tax rates will be necessary in the near future to pay for all this spending, likely to be faced most severely by corporations and the wealthy. Higher taxes would thereby erode the profitability of corporate America, which has enjoyed some of the lowest tax rates in history since 2018. The implications this would have on expected forward stock returns needs to be considered when evaluating current prices in markets. The alternative is the continuation of coordination between the Fed and the Treasury, with the Fed essentially eliminating the debt through the printing of more dollars and purchasing of the debt. The consequences of the Fed’s printing presses firing on all cylinders has historically been inflation or a devalued currency, though other factors in play may keep that fear at bay for now. Demographics, technological disruption, dollar supremacy, and a low-interest rate world may very well allow for this debt to monetized for the time being. This free-ride is ultimately allowing the US to backstop the US economy with few consequences for the time being, but whether these actions have no unintended fallout in the future remains to be seen.
We have made some small adjustments to the portfolios for tax-loss harvesting where appropriate, and to rebalance the models back to their target allocations. We continue to strike a balance between optimism and caution, with the current rally making many stocks look incredibly expensive given the earnings backdrop, while global central banks and governments support risk assets to an unprecedented degree. The disconnect of an economy in shambles and unemployment at record highs with a stock market not far from it’s peak makes us concerned, though this self-induced crisis is unlike any other we’ve seen before. As such, we will remain near our strategic long-term positioning for now and be ready to make tactical adjustments when they become necessary. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.