New year, new President, new Congress. What will 2021 hold for us after such a tumultuous 2020? Given so much uncertainty in our world today, we understand the allure of making market predictions. The problem with predictions over the short-term though is that reality is illogical and random. No one, that we are aware of, predicted a global pandemic for 2020, nor a 70% return in the S&P 500 from the market bottom on March 23rd through yearend.1 Had someone predicted either of those events they would have been summarily dismissed as crazy or a simpleton.
This accurately sums up our belief in the value of market prediction, even though we all find ourselves having to make some form of educated guess about the future investment landscape to deploy long-term assets. Though the events that the world and our lives face seem random, we believe some effects can at least be understood or anticipated.
Hence, as we reflect upon 2020 and look forward to 2021, we believe we understand the importance and implications of liquidity. Public markets primarily exist to provide liquidity. Our entire banking system is structured to promote liquidity to finance and transact trade or business. Liquidity is the lifeblood of both financial markets and global trade.
We believe liquidity is also the fuel for speculation. In our view, one has only to look around at the market to see potential bubbles in the making, or even perhaps already made. Bitcoin, SPACs (Special Acquisition Companies), electric car companies, and the hottest IPO market in decades. All this brought to you by the most massive liquidity injection our economy has ever seen, via fiscal and monetary policies.2
In fact, we believe the unprecedented amount of stimulus, or injection of liquidity, from the Federal Reserve and US Government did help stave off economic disaster. We saw economic numbers decline at depression-like levels as a result of the Government induced shutdowns. Yet the vast amount of liquidity provided to the markets, direct to citizens and businesses, kept the economic ramifications from taking a broader, harsher toll. Then, as fear left the markets, exuberance took hold.
Our belief is markets look forward and discount the future. They are also very reliant upon liquidity as fuel. This combination yielded a surprising bullish surge in 2020, which accelerated on news of the vaccines. Whether the markets correctly discounted accelerated economic growth, or just displayed raw exuberance, only time will tell. But we do believe that there will be a period of elevated and sustained economic growth.
In fact, as we look forward to the next several years we have great optimism for worldwide economies and markets. From our perspective, the combination of low rates and liquidity injections, paired with accelerating technology and its deflationary effects, should provide a beneficial backdrop for capital and labor markets. We think the result of the pandemic will be similar to the economically stimulative effects we have seen in the post-World War eras of the 20th century.
However, we always caution that markets do not go straight up, and that volatility is normal. Bull markets climb a wall of worry, so we see corrections and fear as a normal part of the market cycle. We believe it is possible to see the air let out of some of the speculation we are seeing in ancillary market niches, such as cryptocurrencies, tech IPOs, and SPACs. If this were to occur, it may not necessarily affect a potential rise in earnings and stock prices in the rest of the market, fueling a multi-year rise.
We wish all a prosperous 2021, a speedy return to normal conditions, good health, and a good year for financial markets.
John C. Cheshire
Chief Investment Officer
1. Black Diamond Reporting Software
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