Inoculation rates are driving the re-opening of a post-pandemic economy. President Biden recently announced a target of 200 Million vaccinations by April 25th of 2021. The vaccinations are driving investors to speculate on an improving economy and higher stock prices. The improving vaccination rate is supportive of asset prices. It is not supportive of interest rates, however.
Therefore, I am cautious about adding to fixed income allocations. I believe that there will be opportunities in fixed income, and that interest rates, ultimately will mean-revert to a similarly low level as in recent years due to the excessive burden of debt that is accruing at the state and federal levels. Low interest rates support higher asset prices, especially growth assets.
Stock are hitting all-time highs 13 months after the pandemic-induced crash of March 2020. How can that be? How can stocks have risen 90% from the lows and 20% higher than they were before the pandemic? This is happening because there are more buyers of stocks than sellers of stocks. Not because of earnings, not because of prospects, but because the supply of public investment opportunities is limited and the quantity of dollars available to chase those opportunities is large.
The Pandemic hurt the working poor much more than it hurt the professional or wealthy. Professionals kept their jobs and worked from home. They suffered isolation and the threat of COVID infection. But they did not stop having discretionary income to invest. The same is true of the wealthy.
Stimulus measures put even more money into the hands of some of the Millennial generation. And for the first time ever, they had less opportunity to spend it. So, Millennials started investing through enabling technology providers like Robinhood. This marginal buyer of stocks drove wild buying across many growth companies, especially the more speculative ones. Will these trends continue? Time will tell. I am keeping a close eye on this.
Bonds have gone to extremes. First, when the pandemic hit, bonds rose continuously, even wildly. The 10-to-30-year treasury bond prices rose 20% and more. Our zero-coupon Treasury Strips gained more than 40%. These extremes went on for several months. Many treasury bonds yielded less than 1%. The threat of negative rates was real.
But fear not, the Federal Reserve flinched not at all. It embarked on an aggressive plan to flood the capital markets and individuals with money. Many of these were asset purchases; others were stimulus packages. After producing something close to 11 zeros of stimulus, lo and behold, it worked. Bond yields have retraced their crazy lows of 0.5% back to levels pre-pandemic, 1.7% on 10-year treasuries and 2.3% on 30-year treasuries. Since inflation is likely to exceed 2.3% over the next 30 years, these are not investments for clients seeking to grow their savings. Bonds will still play a role in balanced portfolios. But it’s difficult, at this time, to predict just how important bonds will be for most American families.
Housing moves in very long demographic waves measured in generations. These waves far exceed the duration of economic cycles which are measured in years. To illustrate, a partner of ours recently described the housing market in Buffalo, New York. For 100 years, from 1830 to 1930, Buffalo’s population grew. Then it stabilized for about 25 years into the 1950s. Since then, Buffalo’s population has declined for more than three generations (~70 years). This means that it was easier to buy a home in Buffalo, New York in 2020 than it was in 1920, when the population was still growing strongly. Similarly, it’s more difficult to buy houses in Portland, Phoenix, Atlanta, Austin or Charleston today than in most of the North East. Supply and demand matter.
My point is this: population drives demand and demand drives prices. It appears to me that housing demand will outstrip supply for quite some time to come. The U.S. housing market has been undersupplied since 2009. Housing starts have not exceeded new family formation and demographic growth since the housing bubble burst in 2008. I believe the current trajectory in many markets is unsustainable (low inventory has led to many double-digit price gains and bidding wars galore). Further, it simply is going to be true that the 95 million Millennials born between 1981 and 1999 will eventually marry, rent, and then buy—pandemic or no pandemic. Their delayed entry into the housing market will abate in the coming years.
It is difficult to predict how the commercial real estate market, particularly office properties, will perform for the next few years. The pandemic drove millions of people out of offices and into their homes. Will they return? Will businesses continue to pay for office space that they only marginally use because employees prefer work-from-home scenarios? This is yet another development that I’m watching.
What This Means For You
These large economic barometers give me increasing confidence that the Federal Reserve and National Government will have its way. The economy will likely reflate and government spending will remain elevated. The immunization of the country will continue. Stocks will perform, but, of course, there will still be significant volatility in the riskiest and highest growth assets. The fixed income asset class will remain challenged for years.
The bill for all this debt-financed recovery will eventually come due. But transformational change will outpace the debt delivery and reckoning. Despite all the recent change, owners continue to be advantaged over renters in the U.S. economic policy which is why property owners and stock owners are richly rewarded.
I also remain confident that those who build and follow a long-term financial plan will put themselves in the best possible position to achieve their financial goals. If you have questions about anything I’ve said here, please reach out to me for a conversation.