Looking forward with optimism

The 1973 Oscar for best music was given to Maureen McGovern for “The Morning After,” the theme from “The Poseidon Adventure,” a disaster movie about a cruise ship flipping upside down. Among the lyrics;

“There’s got to be a morning after If we can hold on through the night We have a chance to find the sunshine Let’s keep on looking for the light …”

I’ve thought of these compelling words often in the past year. The pandemic of 2020 felt like parts of the economy and markets were upside down, just as the Poseidon was in the Indian Sea. I hoped to see the light and hold on through the night. The year’s turmoil was more like a natural disaster because it was felt around the globe, and many of its multi-layered consequences will be borne for a long time.

But, as I write this column, I’m truly looking forward with optimism. It’s the first month of a new year, and markets have concluded that 2021 will offer the bright light of likely recovery from the relentless economic and social damage of the coronavirus pandemic. Markets should move back in line with economic drivers of supply, demand, and earnings.

After a decline of 3% in the economy in 2020, we are expecting growth in 2021. Earnings should be up double digits. It will not be a steady climb, however, and markets may be highly volatile.

The slow roll out of vaccines, the weaker than expected government stimulus and considerable structural damage to the services sectors will make timing difficult.

The year may open soft for stocks because many investors are sitting with appreciated stock they waited until after year end to sell. For a long-term retirement investor, this softness is a buying opportunity.

In an update to our clients late last year, we forecasted that with the stimulus, Fed actions, and a potential vaccine, stock markets would overcome the pandemic and the election uncertainty. That proved correct.

Stunning vaccine effectiveness drove stock markets even higher than we expected. Those same forces, along with multiple vaccines, are very bullish for later in 2021.

We believe 2021 will provide many opportunities and challenges. We see an opportunity in small and mid-cap stocks as well as value securities. Finding yield and total return in our fixed income investments will be our biggest challenge. Fixed income did the job of offsetting dramatic stock declines in

March by rising in value as real rates fell to near zero early in 2020.

The secular impact of an aging America, coupled with technology, have resulted in holding down inflation and interest rates. The Fed and government stimulus in March were 20% of GDP. During the last quarter of 2020, with the passage of another spending package, we finally saw interest rates begin to rise.

The Democratic gains in the Senate should give rise to another stimulus package at least as large as the one just passed. We expect at least $1 trillion in additional spending.

In 2021, more government spending, a recovering economy and enormous pent-up demand, should lead to a short-term rise in inflation and interest rates that will not be positive for traditional fixed income. The next few years will call for smart and timely new holdings to adjust fixed income strategies to new realities.

In “The Poseidon Adventure,” the survivors struggled most with their fears. This same emotional upheaval was prevalent among investors (and countless others) in 2020.

Those that trusted their diversification and did not panic increased wealth significantly. Unfortunately, most American investors actually missed out by pulling their money out of stock funds. We are anticipating 2021 as another year when looking past fears of short term volatility will pay big dividends longer term. Be patient.

As always, please contact your financial advisor if you have any questions or concerns about your investment portfolio and how it impacts your financial plan and goals. Happy 2021 to all, and remember, “there’s got to be a morning after … we have a chance to find the sunshine.”

Pete Hoover was destined to be a financial advisor. He has always been intrigued by numbers and money matters. They represent captivating puzzles to be analyzed, shaped and fit into place as pictures of financial solidarity. For nearly 40 years, Hoover has tackled those financial puzzles. In 2005, he launched Hoover Financial Advisors, located in Malvern. Hoover can be reached by emailing pete@hfaplanning.com.

PETE HOOVER