Investment Strategy
by Larry Adam
Chief Investment Officer, Private Client Group

Weekly Headings

February 26, 2021

Key Takeaways

• Mobility indicators improving, that is truer than true
• Out of the stimulus box will come deal one & deal two
• Capex is Capex, no matter how small

This Tuesday is Dr. Seuss’s birthday! The whimsical author’s stories have captivated young readers for decades, and many of his imaginative illustrations have been brought to life on the big screen for audiences of all ages. His success began after he was challenged by William Spaulding, then director of Houghton Mifflin’s education division, to write a story that “first-graders can’t put down” with a minimal number of words chosen from a pre-selected list. Needless to say he accomplished this feat, as the delightful read inspired Beginner Books, a new division of Random House which he himself co-founded. Simplicity was the key to his success, and we think less can be more when it comes to sharing our investment insights too. Our 2021 GDP forecast has been revised higher to 4.5% from 4.0%, but there are a few simple reasons as to why there is significant upside to even this forecast and we’ll borrow a few of the iconic phrases from Dr. Seuss to explain these factors and their potential implications.

1. Oh The Places We’ll Go When Vaccine Supply Starts To Flow | The number of COVID-19 daily new cases, positivity rate, hospitalizations, and deaths have all vastly improved as the vaccine distribution process continues. With more than 68 million vaccinations, the US has already administered doses to more than double the total number of recorded cases, and vaccine makers are making significant strides to abate the supply shortages. Moderna is increasing the number of doses per vial (15 versus 10 previously), Pfizer will expand weekly shipments to 13 million doses per week from the current 5 million, and Johnson & Johnson is prepared to ship 20 million doses by the end of March pending approval for emergency use authorization in today’s hearing. Given these positive developments, we’re hopeful that our expectation of 210 million vaccinations by July 23 (the Summer Olympics’ Opening Ceremony) will be easily surpassed. Strengthening economic activity is consistent with rising mobility indicators, which are already rising in light of the improved COVID-19 trends. An increase in the pace of inoculation that leads to herd immunity and a sustainable reopening sooner will only further bolster the magnitude of the recovery.
2. From There To Here, From Here To There, Fiscal Stimulus Is Everywhere! | The sustainable reopening combined with additional fiscal stimulus should propel economic growth even faster in 2021. With the initial ‘ Rescue’ package in a range of $1.5-1.9 trillion likely being passed, the fiscal deficit as a percentage of GDP may rise past 2020 levels to the widest level in the post-World War II era. The record budget deficit may expand even further once the ‘ Recovery’ phase of the package is proposed later this year. This round of fiscal stimulus, which we anticipate being passed mid-March, will supplement personal income and drive consumer spending moving forward. Excess spending capacity should continue to support the goods sector of the economy, but it will also greatly benefit the lagging services sector as pent-up demand is placated as the economy reopens.
3. Meant What I Said, I Said What I Meant, The Fed Is Faithful To The Recovery – One Hundred Percent | The Federal Reserve’s balance sheet hit a new record high of ~$7.6 trillion last week, and given Chair Powell’s statement to Congress this week, there is no reason to believe the Fed will shy away from its accommodative stance any time soon. In his address, Chair Powell stated that “the economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved.” He also reiterated that its current quantitative easing purchases would continue “at least” at the current pace, and we would not be surprised to see even larger systematic bond purchases or the purchase of longer-dated bonds in an effort to keep the rise in interest rates contained. With no tapering expected, the Fed will remain in pursuit of a broad-based economic recovery that will benefit economic growth in the months to come.
4. With Confidence In Their Heads, & Cash On Balance Sheets To Use, CEOs Can Steer Capex In Any Direction They Choose | Capital expenditures (capex) should serve as a tailwind for economic growth moving forward. As a result of improving economic activity, aggregate CEO confidence and their expectations for future economic growth is at the highest level in 40 years! This is consistent with the most recent regional Fed surveys, which suggest that capex will increase over the upcoming months. While tech-based investment has been resilient, expanded business spending in the aggregate should bolster economic growth.

Be Sure Where You Step, Step With Care & Great Tact, & Remember The Recovery Will Be A Great Balancing Act | Heightened upside risk for our GDP forecast inherently leads to upside risk to our year-end target for the S&P 500 (2021 year-end target: 4,025), as better than expected economic growth should benefit corporate earnings. However, our optimism is tempered as faster than expected economic growth may be accompanied by rising interest rates (the 10-year Treasury reached the highest level in over a year this week) and inflation in the near term.  We detail our view that the most recent equity market volatility provides a buying opportunity in our special Thoughts On the Market publication titled “Inflating Concerns?” (February 25, 2021).

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