Worries, Old and New, Dampen Market

December 11, 2020

Fresh from setting record highs, markets retreated slightly this week. On Thursday, the Food and Drug Administration advisory panel recommended approval of Pfizer and BioNTech’s Covid-19 vaccine. The move clears the way for the broader Food and Drug Administration to grant emergency use authorization for the vaccine, which could come as soon as this weekend. The news failed to garner the type of excitement such a monumental achievement might otherwise achieve – largely because the approval was all but assured following the UK’s own approval last week. Economic data was light this week with inflation, jobless claims, and China trade data being the highlights of the week. Data has been trending negative recently, and with Congress having only one week left to reach a spending agreement prior to recess, investors had been hopeful we would see a relief package by the week’s end. Those hopes had to be put on hold as Democrats and Republicans continue to grapple with state and local government funding and corporate liability provisions. Brexit concerns were also reignited. The UK and EU have until January 1 to iron out a trade deal and to avoid the UK from “crashing out” of the EU. Intense discussions between the parties are to take place over the weekend, but investors were left wondering whether pessimistic rhetoric from the UK’s Prime Minister Boris Johnson and the European Commission’s President Ursula von der Leyen was simply posturing or foretelling of a bigger problem. These items, along with increasing COVID case counts and restrictions, resulted in the S&P 500 falling roughly -1.00% for the week.
Consumer and Producer Prices Remain in Check
Inflation remained modest in November as consumer prices rose 0.20%. On an annual basis, prices were higher by only 1.20%. Core prices, which exclude the volatile food and energy categories, also rose 0.20% for the month and 1.60% from the year ago period. With people seeking to escape their Covid-19 cabin fever during the Thanksgiving break, energy prices, lodging, and airline fares rose 0.40%, 3.90%, and 3.50% respectively in November. The gains though were offset by a drop in used cars and trucks which have been a hot commodity throughout much of the pandemic. Those items fell -1.30% in November, making it their second consecutive monthly decline. Producer prices were tame in November as well, edging up a mere 0.10%. That was their smallest gain since April. On a year-over-year (yoy) basis, producer prices were up only 0.80%. Excluding the volatile food, energy, and trade services components, producer prices rose 0.10% month-to-month and 0.90% in the 12 months through November. While prices for some goods have risen during the pandemic, they have been more than offset by lower prices in other areas – namely any good or service requiring a high degree of social contact. Inflation remains well below the Fed’s target, and the concern for the Fed is likely to be deflation over the next quarter or until the vaccine results in people circulating more freely 
Covid-19 Cases Push Jobless Claims Higher
Initial claims for unemployment continued to climb higher last week as Covid-19 restrictions have forced some businesses to scale back operations. Weekly claims rose by 853,000, up from the 716,000 reported the previous week. The latest figure is the highest number since Sept. 19 and reflects the difficult operating environment for businesses amid a flare-up in coronavirus infections. Continuing claims also rose, up 230,000 to 5.76 million. That was the first increase in continuing claims since late August. With Covid-19 cases expected to continue to climb, an extended period of Covid-19 operating restrictions and rising jobless claims are likely in store.  
China – First to Get Sick, First to Recover
China’s economy is starting to hum again, helped by strong global demand for the country’s goods. China reported a record $75.4 billion trade surplus in November, driven by a 21.1% yoy increase in exports to the rest of the world. Demand for Chinese goods was led by the U.S. with imports from China rising 46% despite U.S. tariffs. China also posted strong order growth from the European Union where exports rose 8.60% yoy. The major items in demand were personal protective equipment and electronic gadgets from those continuing to work from home. With China having Covid case counts under control, and global vaccinations around the corner, the Chinese economy looks well positioned to capitalize as we emerge from the Covid winter.
There is not a great deal to pontificate on in this week’s market action. A modicum of reality has begun to set in now that new lockdowns have begun to have an impact on data. There is still some investor euphoria to be sure. This is especially true in the IPO market where DoorDash and Airbnb rose +72% and +100%, respectively, in their first week’s debut. Neither make any profits for what that is worth. The major bank and investment firms have begun releasing their economic and market forecasts. This year’s consensus expectation is that we will see GDP and earnings recover to pre-pandemic levels by Q3 2021, and 2021 will be another strong year for markets in general– with returns somewhere in the low to mid-teens. We continue to believe that the next three or four months are more precarious than investors are currently giving credit. This was true when we were dealing with just Covid, but now Brexit appears to be reemerging as a flash point. Still, our concerns are mainly isolated to the potential for near-term volatility due to additional Covid restrictions, and once those begin to rollback we do see the momentum bias continuing in 2021 even while valuations remain less favorable than what we might otherwise prefer.
The Week Ahead
It’s a big week for markets with the Federal Reserve’s FOMC Meeting, retail sales, and housing starts all on tap.

Year End Bucket List

This has been quite the year! It has had it all from a financial planning, retirement planning, and portfolio management standpoint: 2020 brought concerns over income stability during the early stages of the pandemic and market volatility where people saw their asset bases deplete. In the current environment, the S&P is setting all-time highs on nearly a daily basis. Prior to the pandemic, the S&P reached a peak on February 19th at a value of 3393.52. When the seriousness and severity of COVID became clear and many parts of the country were facing lockdown and commerce and production came to a halt, the market declined 35.41% in just over a month to reach a trough on March 23rd at a value of 2191.86. Just five months later, the market was back to its February peak with a high of 3395.06 on August 18th to break even. On December 9th, the market reached a high of 3712.39, representing a 69.37% increase. From peak to trough and back to peak again took less than nine months. The average bear market is 14 months and typically takes two years to recover. 
The feelings of concern experienced during those early days in the spring and into summer are still fresh but fortunately markets bounced back, and many investors are feeling more stable and confident. Those who were well-prepared with traditional financial planning strategies were better able to weather the turmoil of 2020 with a lot less financial worry and fewer sleepless nights. Whenever we go through something like this, it can be a bit of a wake-up call. As we look ahead to 2021, here are some things to consider as the new year approaches.
1. How much did you spend in 2020?
For many people, spending was down due to the pandemic with restaurants closed and travel curtailed or restricted and with more people staying home. With the year nearly behind us, it’s a good time to look at your spending. Even if you don’t intend to adhere to a strict budget, you may be surprised about things you are spending on that you no longer value such as subscription services or memberships you are no longer using. Any good plan starts with knowing where you are spending and evaluating how important those things are to you. Identifying your absolute necessities and whittling away what you can do without can make room for some splurges, experiences, or luxuries that you may not have been able to consider over the past year.
2. What are your sources of income?
On average, our clients have about 30% of their spending generated from guaranteed income sources in retirement, such as Social Security, pensions, and annuities. The higher your percentage of income is from guaranteed sources, the less you have to rely on your investment portfolio to supplement your spending. All investors – from those just entering their working years to those in retirement – need to have some reserve fund or bucket of money earmarked for emergencies and spending. Younger individuals who are accumulating assets for retirement generally should have six to nine months of living expenses, and retirees should have assets equivalent to one to two years of spending. These funds don’t need to be strictly in cash, but they need to be in asset classes that are secured and not tied to market volatility.
3. Do you need to replenish a delta or remove a surplus?
We are writing this in an incredibly fortunate period of the market where we are hitting all-time highs, but the experience of the past year reminds us of the importance of having a solid financial plan with sufficient funds to cover near-term expenses and emergencies. One of the biggest detriments to retirement planning is a negative sequencing of returns. What this means is that returns are not consistent, so while on average the market may return 10% over time, the reality is that it is earned in some years with extremely high returns and some years with extremely low returns. To avoid having to create liquidity while the market is down, it is important to maintain a spending and emergency fund. Yearend is a good time to rebalance your portfolio and harvest gains and losses to maximize the net cash you will receive to replenish these funds, if needed. If you were more conservative in your spending, and your bucket is already full, then consider putting money into the market so that it is working for you.  
4. Has your risk tolerance changed?
Asses the level of concern that you may have experienced during the trough of the market this year. Again, the decline was short-lived relative to other bear markets, but no one likes seeing the value of their assets go down, and we all wish we could avoid it. If you contemplated making drastic shifts in your portfolio, then it may be a good idea to evaluate whether you had a good plan in place prior to the pandemic and whether your portfolio was right sized to your overall risk tolerance.
Yearend is a good time to assess your financial picture and shore up your plan for the coming year. If you have any questions about your portfolio, financial plan or investment strategy, please do not hesitate to call our office and speak with one of our advisors. We would love to help.

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