With 2020 thankfully over, many of us are now casting a hopeful eye towards 2021. Incredible advancements in gene sequencing and medical technology have allowed humanity to diagnose a deadly and devastating novel virus, use new techniques to create multiple versions of an effective vaccine and then initiate the largest vaccination campaign in modern history, all while largely socially distanced and within the span of nine months.
The course of the economic recovery and the implications for the capital markets remain driven by the timing and our ability to gain the upper hand on COVID-19. The countdown clock has started as the race between inoculating the population against the continuing transmission and mutation of the virus plays out before us on a global stage. While it can be difficult to see through this difficult time as COVID still rages through many parts of the world, we can get a glimpse of what returning to some sense of economic normalcy might look like by observing China, which recently beat consensus Q4 GDP estimates. For the year 2020, China’s economy actually grew by 2.3%, in stark contrast to the declines among the rest of the world’s major economies. By effectively controlling the spread of the virus and aggressively distributing vaccines, China has been able to reopen its economy sooner, which has allowed its interest rates to return to pre-COVID levels without excessive stimulus. For comparison purposes, China’s stimulus as a percentage of GDP was less than 20%, compared to nearly 50% in the US and Eurozone and over 70% in Japan.
Figure 1: As a Percentage of GDP, Beijing’s Stimulus is Less Than Half of Developed Economies.
Source: Cornerstone Macro
As the world’s second-largest economy, China’s recovery is very important. A steadily growing Chinese economy helps reduce overall global economic volatility and aids in a broader expansion for the rest of the world.
Our domestic economy is largely driven by consumption, and there is good reason to bet on domestic spending in 2021. Aggregate consumer balance sheets are extremely healthy as low interest rates and increased savings have allowed the consumer to accumulate savings in excess of $2T dollars. December’s additional stimulus package will likely increase excess savings to nearly $3.5T dollars, which is $2T dollars higher than pre-COVID levels and the highest level since WWII. It is not unreasonable to assume the pent-up demand would result in at least half of those excess savings being spent, which would likely lift overall consumer spending by 7% year-over-year.
Figure 2: A Cure for Pent-Up Demand? The US Consumer’s Spending Firepower.
Source: Cornerstone Macro
In addition to promising savings and spending data, the US job market remains fundamentally healthy. Clearly the Leisure and Hospitality sectors continue to struggle, but overall employment numbers continue to grow and will likely continue to do so as access to a vaccine becomes more available and our own reopening gradually occurs. This positive trend is further reflected in December’s manufacturing production rebound.
Figure 3: Manufacturing and Industrial Production are Rebounding.
Source: Cornerstone Macro
Strong economic growth combined with too much stimulus can create problems in an economy, namely through inflation. Traditionally, central banks proactively raise interest rates to ensure inflation does not become the proverbial genie that escapes the bottle, as it is difficult to contain once it gets out. Though our growth is indeed recovering, and we have plenty of stimulus in our system, US bond yields look reasonably valued at these levels. This phenomenon is because Treasuries trade in relation to German Bund rates, which remain extremely low due to negligible Eurozone growth and continuing bouts of disinflation. In short, we do not expect a persistent rise in rates over the next couple of years, and we tend to take the Fed at its word.
Figure 4: 10-year Treasuries Should Maintain Altitude Around 1%.
Source: Cornerstone Macro
Capital Insights readers may note that we have written frequently about investing into the secular theme of Innovation for the past couple of years. In addition to providing interesting topics to write about such as eyeglasses with built-in video screens, or perhaps timely solutions to global pandemics such as genome sequencing, Innovation and Technology serve as tremendous counterweights to inflationary pressures. Innovation and Technology increase productivity, broaden the supply of employment and ultimately allow for steady non-inflationary growth. As our digital economy grows, so does the economic opportunity for its participants and investors.
Figure 5: Innovation and Technology Gain a Larger Share in a Growing Economy.
Source: Cornerstone Macro
While we are grateful to see 2020 come to an end, we are equally grateful to see how investing into these themes has materially benefitted our clients in a most tumultuous year. We expect the combination of a promising economic reopening, low interest rates and subdued inflation will continue to support the equity markets into 2021 and that our broader theme of Innovation, and sub-themes of Genomics, Clean Energy and FinTech will continue to provide excellent sources of returns in the public markets. We expect to bring additional Private Capital opportunities for qualified clients who are seeking differentiated sources of return over this next cycle as well.
Our Capital Insights readership continues to grow substantially and now encompasses clients, prospective clients, strategic partners, as well as friends of our firm. To our clients, we deeply appreciate your business and trust in your Capital Planning Advisors team. If you are not a client and are contemplating initiating a relationship with us, either directly with your personal or business assets, or by referring someone you think could benefit from our services and approach, we would be delighted to speak with you.
We continue to experience steady and stable growth and we are grateful that everyone on our team is healthy and safe. We sincerely hope that you and your loved ones are keeping well and please do not hesitate to contact us if you have any questions or if we can be of further assistance.
