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BCN Advantage - 2020 Annual ReportFebruary 9, 2021
Jeff Bratzler, CFPBCN Financial
For 2020, the S&P 500 gained +16.3% to 3,756, the Nasdaq +43.6% to 12,888, and the Dow +7.2% to 30,607. These are extraordinary gains coming in the midst of a global pandemic that precipitated economic devastation in the U.S and worldwide. What cannot be underestimated is the power of fiscal and monetary stimulus to lift asset prices, especially in the tech heavy Nasdaq. Since the Fed reversed course in January 2019, the Nasdaq has nearly doubled, up 94% from its December 2018 level of 6,635. The Fed’s balance sheet increased by more than $3.25 trillion since February 2020, once the ravages of COVID became fully apparent. Add to that $2 trillion authorized under the March 2020 CARES Act, the $900 billion supplement in December 2020, and the current Biden proposal for another $1.9 trillion, and the total fiscal and monetary response to the pandemic will be more than $8 trillion – roughly equivalent to 37% of the entire $21.5 trillion U.S. economy. The U.S. economy was humming along in mid-February 2020. There were only 15 reported COVID cases in the U.S. and as yet no deaths from this mysterious novel virus. Less than 5 weeks later, with reported cases approaching half a million and deaths nearing 700, the S&P 500 had plummeted 33.9% before bottoming at 2,237 on March 23rd. In the early days of the decline, we issued a series of notices urging our clients not to sell. “From long experience, we know that stock markets usually recover quickly from panic selloffs, especially in circumstances like we’re experiencing today, when the U.S. economy was on strong footing prior to the crisis.” By mid-August, in the face of continuing lockdowns and no real end in sight to the global pandemic, the major indexes had fully recovered and kept powering ahead despite more than 20 million reported COVID cases and 355,000 deaths in the U.S. by year-end. As of December, the economy is still 9.8 million jobs short of where it was in February before the pandemic, and more than 20 million Americans are still claiming unemployment benefits. At 6.7%, the unemployment rate remains nearly double its pre-pandemic level, and the labor force participation rate, at just 61.5%, has sunk nearly two percentage points below pre-pandemic levels. Federal Reserve forecasts show the labor market not returning to 3.7% unemployment until the end of 2023. The Fed has maintained its interest rate target at near-zero and reiterated its commitment to at least $120 billion a month in asset purchases until “substantial further progress” is made on the recovery. “Any time we feel like the economy could use stronger accommodation, we would be prepared to provide it,” Powell said on December 16th. The imprecise language, however, will keep Fed watchers and investors guessing. Markets are showing visible signs of excess speculation, with a record $272 billion flowing into stocks over the past 12 weeks. The S&P 500 is trading at a forward 12-month price-to-earnings (P/E) ratio of 22.9, well above both its five-year average of 17.6 and 10-year average of 15.8. Fund managers are underweight cash for the first time since May 2013. With cash levels so low, much of the expected growth has already been "priced to perfection”. As expectations rise, so do the opportunities for disappointment. Higher interest rates and inflation are key risks. The huge injection of liquidity (both fiscal and monetary), the Fed’s expressed tolerance of higher inflation and massive government debt (currently $27 trillion and counting) pose a structural threat of inflation greater than at any time since the 70’s. Since the 2008 financial crisis, corporate share repurchases, or "stock buybacks," have accounted for nearly all buying in the market. The total amount of stock bought back by companies even exceeds the Fed's bonds purchases over the same period as part of quantitative easing. Now, companies are hoarding cash and markedly decreasing share buybacks from 2015-2019 levels, at the same time they have increased outstanding shares. Notably, over the last 20 years, the only two previous periods where corporations increased shares outstanding were during the 2000 and 2008 recessions. The Biden administration could substantially raise taxes on many U.S. corporations. An increase in the capital gains tax might also put pressure on the markets. And even with targeted support, vulnerable sectors such as travel, hospitality and leisure could remain hard-hit by the outbreak, giving rise to the notion of a “K-shaped” recovery. While the vaccination program is starting to gain traction there is a window of extreme vulnerability as the number of cases and hospitalizations rise. Should the new, more transmissible variant of COVID gain a foothold here then this would increase the threat of more near-term containment measures, which would undoubtedly come at a severe economic cost.

U.S. Deficit Jumps to Record $1.7 TrillionApril 16, 2021
Martin CrutsingerSource Address    Yahoo - Finance
The U.S. government's budget deficit surged to an all-time high of $1.7 trillion for the first six months of this budget year, nearly double the previous record. In its monthly budget report, the Treasury Department said the deficit for the first half of the budget year — from October through March ...

Fed Staff More Worried than Chairman PowellMarch 1, 2021
Rich MillerSource Address    Yahoo - Finance
Federal Reserve staff members gave a potentially more worrisome assessment of the risks to financial stability in the central bank’s policy meeting last month than the one presented publicly by Chair Jerome Powell. Speaking on Jan. 27, Powell called financial stability vulnerabilities overall “moderate.” ...

A Toxic Taper Tantrum ComboFebruary 26, 2021
David RanasingheSource Address    Reuters
In May 2013, bond investors threw a tantrum after hints the U.S. Federal Reserve might slow the money-printing presses. A similar selloff now, with another $70 trillion added to global debt, could prove to be far more vicious. A 2013-style “taper tantrum” was named as one of the top market risks in ...

U.S. Bond Sell-Off Stirs WarningsFebruary 25, 2021
Aziza KasumovSource Address    Financial Times
The drop in US government bond prices in the opening weeks of 2021 poses a threat to Wall Street’s record run. High prices and vanishingly slim yields on Treasuries have provided a key support for equities since the shock of the coronavirus outbreak last year. But, stung by expectations for rising ...