[Season 2 Ep.1] Market Update Podcast

[Ep #17] Market Update and the Coronavirus (Transcription)

Laila:

Good afternoon, everyone! Glad you could join us. We have a lot to cover on this volatile day. This is episode one from season two of these podcasts, and we want to cover a lot. Of course, we’re going to start by covering today’s markets — what happened today and what to expect — and have an economic update where we’re going to talk about the stimulus package. Then we’ll have a vaccine update and where we go from here, then a bit about cargo and e-commerce, and then we have a couple of client questions that we’ll answer.

Then, we’ll end the session by talking about tax forms and RV reminders. So, with that, I’m going to have Dryden answer the hottest question that most of you have: What’s happening with this market, what can we expect, and what’s the local economic update?

Dryden:

Good afternoon, everybody. For those of you that watch the market every day, you could recognize that this is a moment where the volatility we’ve been talking about has finally arrived. So, we’re beginning to see some volatility in the markets where we’ve had movements all over the last week. What’s important to recognize is what’s moving the market and separating the noise from reality.

Now, to that, I’m going to combine some things about the economy and the markets together, because it’s essential. When we look at this year, we’re looking at this year as a tale of two halves. You have the first half of the year, where government stimulus is the most critical part of what’s going on with the economy. In the second half of the year, you have economic stimulus from the populace coming in, and we’ll get deeper into that a bit later.

You think about this year not as day to day, week to week, or quarter to quarter, but really as two significant drivers — the first half of the year, as government; the second half, as the populace. As we get past the virus, people are going to be out and using pent-up demand. So the next big thing is to pay attention. Folks always seem to want to have something to be terrified of and frightened of. For the last year, everyone’s been frightened of the virus. Now, we’ve reached that moment between caring for people medically and the vaccines where people’s behavior has changed. You’re seeing this environment where the virus is becoming less and less of a concern for people in their lives and less of a concern for the economic well-being.

We’re also overcoming what has been the artificial shutdown of our economy by government agencies. It is not the virus that caused the recession — but it is governmental policy restricting economic activity. Everyone, by this time, knows somebody or loves somebody that’s had the virus. Some people have had tremendous negative effects, and our hearts go out to them. We must pay attention to that. The aspects of the virus, though, are very focused on certain portions of our society. You can look at my video from the 19th of the month for more details. Now, let’s talk about what I call the church of “what’s happening now.”

There are two big issues now that we’re not as much worried about the virus. Those are the fears of rising interest rates and rising inflation. It’s all about interest rates and inflation. We’ve talked in the past that interest rates being very low allow you to have higher P/E ratios in tax stocks. That’s what’s fueled some of the accepted weakness of this high level in the market. So, as people get worried about interest rates going up, that’s how some of this volatility starts. Not only is it volatility created by people — you must realize there’s been 10 million new brokerage accounts, many from individuals that got their stimulus check. Those that didn’t need to spend it speculated with it. Therefore, you have a lot of people who have become what I call “recreational” investors. This is where you see the Reddit crowd, and those large “crowdsourcing” of movements, things like that.

So you have this thing going on with the market, and then you also have program trading in the market. That when you see these pickups of the magnitude of increase in interest rates; they hit sell buttons and then have shorts, and you have a lot of embedded volatility that occurs as an overreaction. I want you to pay very close attention to this. This is an overreaction to a movement of a very low rate. The interest rates are still below 2%. So when you look at the short-term rates, interest rates are still incredibly low in real perspective. A 10-year 1 1/2% is still incredibly low. So yes, it moves up, but it’s not moving up in a way that it’s crowding out a lot.

People are overreacting to this. Then you also have to look at the idea of inflation, and people going, “Why are interest rates moving up?” Well, it’s because of expected inflation, and there’s some inflation out there, and you see that. This is important on how these things work. So first of all, is there some inflation? The answer is yes. What is inflation caused by? Well, a couple of things. One, the economy is getting better. There’s higher demand. When there is higher demand, there becomes higher inflation, right? Because there’s more demand for products and their supply. Why is there more demand than there is a supply? Because supply chains have become constrained. We did have COVID; it did affect the global supply chain. Laila’s going to talk about this in a bit, but when you see these moments as we’re a year into this, there are times where you’ve got some constriction in the supply chain.

That’s creating some shortages that make prices go up. People look at that. They react to it. We’re seeing that people are overreacting in our minds to what are relatively temporary sets of circumstances that create some nominal inflation and generate an increase in interest rates. They always say, don’t fight the Fed. The Fed wants us to have 2% inflation. They’ve been trying to get us to have 2% inflation since 2000; okay, this is a 10-year effort by the Fed to continue to have this type of inflation. It’s what they want. Okay. So it’s not something to be overly afraid of. Some of us lived through the early 1980s, and we still have the scars of the ’70s and the ’80s of high interest rates and high inflation.

We’re not going back to that. So the situation is you see an overreaction in the market to two things. There’s a tick up in interest rates. The Federal Reserve has said they want interest rates to be low. If you remember, a couple of years ago, we had a tick up in interest rates. The next thing you know, the Fed came in and stepped on it. The Fed can push this 10-year down if they want. We may reach a point where they do. The Fed also wants us to have a little inflation. So they’re not worried about this inflation situation at this time. So there’s a lot of volatility around headline news and panic. All of this is just creating some stuff that we believe is somewhat temporary.

About the NASDAQ — it’s down about 7.8% from an all-time high. We get this a couple of times fairly frequently. This is not the first time this has happened. A 7% pullback in the NASDAQ — while it may feel a little uncomfortable cause it’s happened now — we still tend to look at that as part of the natural battle rhythm of the markets. Again, this is not something to be overly concerned about. This is part of the natural battle.

So, a summary before I’ll turn it back over to Laila. That first part of the year on the economy is about government stimulus. The second part of the year is about the fact that people have a lot of money, and they’re going to start spending it as the economy opens up. So that’s a populace stimulus. So in all of this, the economy has a tremendous stimulative effect going throughout the entire year.

We’ll probably have some volatility here in the early part of the year. It’s not something that is unanticipated. It is something that we tend to prepare for. It’s something that is the usual battle rhythm of the market. So the short answer is it’s not unanticipated, and it’s something that we think is actually kind of healthy in this environment. Those are the two big things to know, and those are the things we’re watching for this. Some of this volatility is actually going to create for us some opportunities now. Laila, I want you to cover some of the details around the stimulus and these things that are going on? Thank you.

Laila:

Last podcast, when we talked about the stimulus package, the government wanted to get the stimulus package passed by both Republicans and Democrats. We thought that we wouldn’t get a $1.9 trillion package; we thought would get somewhere around a trillion-dollar package. Since then, a lot of the Republicans are not on board with a lot of the details of the stimulus package. So Biden has taken a different path, using the budget reconciliation methods, which only needs 51 votes to pass.

So consequently, this bill is going to be a lot bigger. It’s going to be close to $1.81 trillion. I believe that is part of this inflation worry — that there’s just so much money going into the economy. Remember, there was $1.4 trillion more in savings in December of 2020 than in January of 2020.

There’s a lot of money into the economy, and now there’s $1.9 trillion that will probably come in. The way that we think it is going to break down is that there’ll be $1,400 per person for lower-income and middle-income America, and the government will extend the $400 unemployment to September. Otherwise, it’s the $300 in benefits right now that will expire in March. Also, that $1,400 is going to come in a debit card, not checks. People can transfer it into the bank, but most likely, when you get a debit card, you’re going to take that money and spend it. That’s why they think they’re giving it in a debit card versus a check, which is what they did the first time last March. So we think that’s got us for even more spending, and then there’s money coming into the state and for the vaccine and the schools.

The big controversy in this bill is still about the minimum wage, which they’re trying to push to $15. Right now, the minimum wage in the United States is $7.25. This bill would take it to $15 in four years, which is a pretty big jump. This is, I think, the one area that we think they might compromise on to $12 as a minimum wage. That’s where the bill may come in at $1.8 trillion versus $1.9 trillion, but it is a big bill, and it is a lot of money coming into the economy.

This is what we think drives the first half of the year. It’s all about the stimulus. It’s all about the money that’s coming in from the stimulus package. It’s also about what is happening right now. The fact of the matter is that the status of the numbers in the vaccine is a lot better than people thought. I want to cover that because we believe this is a second stimulus. So we have two stimulus packages going on. We have the actual stimulus that comes from the government, and then we have a vaccine stimulus. So Johnny, could you cover that?

Dryden:

The government stimulus is short term in nature. The real fundamental stimulus is opening the economy back up. The preconditions for that have been overcoming COVID. Well, when you look now, we have this environment where 82 million vaccine doses have been distributed, and 65 million of those have been administered. We are beginning to see many people in the United States have received the vaccine, and it’s going up very rapidly. So you have this moment where you’ll have herd immunity. That’s where the number of people who either have the vaccine and have antibodies from that case, or people who have gotten it and survived and have antibodies. We’re going to see very close to levels of herd immunity occurring somewhere between April and August, right?

There’re all sorts of debates about when it’s going to happen; there are no debates about whether it’s going to happen. You’re going to have moments of this acceleration of human demand, and people that have a tremendous amount of money that they have saved. So while the rollout of the vaccine has not been perfect, it is accelerating. As that happens, the economy is going to follow suit. There’s no longer any excuse for these government-mandated lockdowns of normal human behavior and activity.

I mean, you’re going to see vaccinations hitting more than 20 and 30 million people in a week, and they’ll be able to go about their normal lives. We must recognize that this is coming, and it will be highly stimulative. We’re going to get back out to do that which we used to do. We’ll do it differently, but this is still a highly stimulative environment, and that data around this is looking very, very good for the second half of the year.

Laila:

If any of you have taken a boat or driven by Long Beach or the LA port, there are an enormous number of cargo ships there. Actually, last Friday, Dryden and his crew took a helicopter ride over those cargo ships to see the magnitude of that. It has a tremendous effect on our economy and e-commerce as a whole. On Monday, there was an article in the Orange County Business Journal talking about no letup in the cargo ships. Long Beach’s port has had a 22% jump, making January the busiest month; LA’s port had 87 cargo vessels that arrived last month. It can take eight days to unload them; that’s why there are so many in port.

There’s so much money and so many goods coming into the United States, whether through Long Beach or LA. The Record said that there are 113 vessels docked or at anchor. The reason it’s taken so long is that there are workers that are out with the virus, and so there’s a little shortage of humans to actually offload. So, but what matters is the tremendous, tremendous amount of cargo that’s coming in because of e-commerce. Here are the facts: Online sales doubled in the last 10 months, and that has contributed to the LA port having a 50% increase of hardware in the second half of 2020. So we continue to like e-commerce as an investment vehicle.

That is proven; just drive by and see the amount of cargo coming in. People are spending. That will start reflecting even more and more so in earnings because the thing that is worrying investors out there are the prices of equities. Are they too high? Well, the fact is that we have a lot of sales coming in, and we have monies coming in from the stimulus package. People have money they’re going to spend on e-commerce and actual commerce. So we do think that the earnings are going to are catching up; it’s certainly to the valuations. We’ll talk a little more about how we’re positioning that because that is the next question I want to cover. Quants are asking if our investment strategies have changed when Biden was inaugurated? If so, can you summarize it? So with that, I’m going to turn it back to Dryden to kind of talk a bit about how we’ve changed and how we change the portfolio a bit.

Dryden:

So a couple of big things to know. As we look at the other changes that we reacted to based on anticipated policy, one is that we’ve, we’ve increased financial in the portfolios a bit because that is something that tends to benefit from the rise in interest rates and how those things work. For some markets, the other thing that you see helping is payment systems. So that shows up as financials, but they’re actually technology payment systems. That’s because of e-commerce; if you order something online, you still have to pay for it. That increases credit charges and payment systems. That we see as a continued increase for portfolios.

So there’s all of this money that we’re trying to throw at the system. We think that investing in companies attached to infrastructure makes sense and is consistent with the portfolio. We are also looking at cyclicals that focus on human demand because people do have a lot of excess money. You’re going to see these imbalances in supply and demand like the supply chain. That’s going to move prices around a tad, but in total, this is all fairly stimulative. So that’s how we move the portfolios around, twisting more to infrastructure. You’ll see some of those changes as we move forward.

Laila:

Some of these things that Dryden is talking about, you’ll see those going more and more into your accounts. Another thing: If any of you listened to Jerome Powell’s testimony yesterday, he came out and said that GDP this year (because of all those things we’re talking about) is expected to be 6%. I’ve been in this world here a long time. I can’t ever remember a 6% GDP, and in a way, that is also freaking the market a little bit as far as the idea that the Federal Reserve will have to raise interest rates. However, they’ve also come out and said that they have no intention of raising rates for the next three years. So the market is kind of driving this themselves. Again, we really think it’s a little bit of program trading that is why the market tends to go down very quickly and tends to rebound quickly.

Dryden:

Most of you have seen a rebound or rebalance in your retirement accounts. Your non-retirement, however, is going to take us a little bit longer because we’re mindful of tax consequences. However, as we move forward with these fundamentals, be prepared for some headline-driven volatility. People are going to say, “Oh my gosh, this is too high.” Or, “Oh my gosh, this has gone this way or that way.” A lot of that is because they’re not stepping back and trying to have some longer-term perspective over what’s going on. So you’ll continue to see this volatility. You continue to see headlines, you’ll continue to see all these things going on. Just remember to take a breath, step back, and recognize that in the end, fundamentals win. Both in the economy and the markets and companies, fundamentals win. You have this environment where the fundamentals are in a position to recover exceedingly well now.

Laila, this is the time of year when we have to talk about taxes.

Laila:

This is the time of year that we get a lot of calls. “When am I getting my tax paperwork?” “My dividends and my 1099s and so forth.” In the old days, LPL and other companies would send out the 1099s in January, and then they would send out revisions of the 1099. Then they’d send another revision of 1099s because the information they get from mutual funds or other institutions takes a little longer. So now, most institutions have delayed having these 1099s come out. You should have gotten some 1099s already on February 19, but the bulk of the 1099s should be around March 15.

Some will be on March 30, but that is the schedule right now for 1099s. There’s also something very unusual that happened last year that we’ve done for those of you who were last year required to take required minimum distributions, RMDs. Because of COVID last year, they allowed us a holiday. To many of you that had taken the RMDs chose to give back, and many of you who gave it back at different times of the year, we are sending out a letter to all of you in the next couple of days to explain the situation. What’s going to happen is you will get a 1099R from LPL saying this is how much RMD you’ve taken. They’re not going to tell you that you put it back. You basically have to tell your CPA that you took it, but you gave it back. He will record that as basically non-taxable because of the way the IRS works. I don’t send out the form that says that until May 30.

It’s called form 5498. That’s when they actually tell the IRS, “Oh, by the way, they put it back.” That’s nothing in our hands; it is the IRS rules that do that. We did draft a letter about it that you should be getting early next week. Just take that letter to your CPA. If you have any questions on any of that, please contact our office, and we’ll help. So those are two significant announcements I wanted to make before we leave you today. The other announcement, of course, is that our next podcast will be Thursday, March 25, at the same time. Then our client luncheon, in-person. It will be Saturday, September 18.

Then just a couple of client actions. There are really three of them. First, if you have not signed up to get our daily blog, please go on and sign up about that. You can go on our website and scroll down to sign up for the daily blog. It’s a great blog that we do every day that talks about the market and the holdings and all of that. Number two? If you’ve been thinking about loss conversion, you always want to convert with the market is lower. This is a good time to do that. Last but not least, as always, this is a market opportunity. If you have additional dollars in the bank or additional dollars that you have not invested to take advantage of this opportunity, we think this is a good time. This volatility is, is welcomed. It is part of the market. I know it doesn’t feel good when you get your statements at the end of the month — for example, the market last week had kind of a big downturn in terms of dollar amounts. I know percentage-wise, it’s not as big, but there is that dollar amount. They look big, but this is the time actually to add your account if you can.

Dryden:

As Laila said, we want to take advantage of volatility and not be its victim. So we’re well-prepared for this, and we’re able to help everybody through it. I want to take a second and thank all of you because, if you don’t know by now, Laila has been named the number one financial advisor in Southern California by Forbes magazine for the third year in a row. I want to give her big congratulations for that. That is a great tribute. Three years in a row means that we’re consistently doing something right. I want to thank each of you for your support, faith, and trust you put in us. Everyone here on the Pence team works really, really hard to be worthy of that trust. We also certainly appreciate the referrals you give us from your friends. Please continue to do that! It’s a good thing for us, and also, thank you to Laila and congratulations.

Laila:

I want to really thank my team — I know I get many of the actual leads, but it really is a team effort. I can’t do anything without my team! They’re my biggest assets. Thank you for taking the time to listen today.