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Once In A Lifetime

And you may find yourself living in a shotgun shack

And you may find yourself in another part of the world

And you may find yourself behind the wheel of a large automobile

And you may find yourself in a beautiful house, with a beautiful wife,

And you may ask yourself, “Well, how did I get here?”

--Talking Heads

There are years and there are years, and 2020 was the latter. It was one year ago next week when pandemic panic in the markets was at its pinnacle. In a matter of weeks, as fears about COVID-19 spread even faster than the virus itself, the world ground to a near complete halt, taking with it the longest bull market in modern history. We all know what ensued—panic, followed by hope, followed by even more hope, and of course unprecedented governmental stimulus. We’ve all done more than our fair share of finding ourselves during the once in a lifetime events of last 12 months. Now, after a year of suspended animation, people are starting to think back to where we were before, as human beings let alone investors, and, dare I say it, make plans for the future.

Perhaps that’s why so many of us are wandering around squinting like moles in the sunlight this month. The changes in our lives we have all been dreaming about for a year are starting to take place. Offices are reopening. Gyms are reopening. Students are returning to school. There’s talk of summer concerts, at least at some reduced capacity. At the time of this writing, 23 percent of Americans have received at least one dose of a COVID-19 vaccine. We are edging closer and closer to something resembling our pre-COVID lives.

Great news for markets, right? Well, sort of.

Clearly, finally getting a leg up on COVID-19 is wonderful news for the world. While we can expect setbacks in the form of variants and surges, it’s getting much harder to make the case the worst is still in front of us. America’s economy is about to surge and the outlook for American business is bright. Ironically, this may be a short-term negative for some pockets of the financial markets and it basically comes down to math. Last year’s economic interruption crushed corporate earnings across the board, but thanks to the Fed and to vaccines, markets correctly surmised that earnings would recover dramatically this year, justifying historically high earnings multiples. Now this year has arrived, thankfully, but investors are now reassessing how much they really need to pay for growth when growth will be more abundant throughout the economy this year. This is showing up in the recent underperformance of tech-heavy equity indices versus more traditional indices such as the Dow. This is normal market behavior; it’s actually kind of cool to watch.

The near-term outlook for some asset prices gets a little bit less rosy, just at the margin, when markets start to expect this newly abundant economic growth to ignite a little bit of inflation. Inflation, which we have not seen in meaningful amounts in this country in decades, leads to higher interest rates, and higher interest rates lead to lower asset prices. It’s actually a circular argument over the long term, because abundant growth is what we want, after all. But the ride can get a little bumpy in pockets of the market where speculation has bid up asset prices. Pricey stocks, (high priced versus modest earnings) react more negatively to rising rates than inexpensive stocks, all else equal, because higher rates effectively mean that future earnings are not as valuable as they otherwise would be. Rising inflation diminishes the attractiveness of longer duration assets because it means that the cash to be received from owning those assets in the future is worth a little less.

Whenever inflation ticks up, gold bugs and more recently cryptocurrency enthusiasts have a field day and would tell you that we will soon be toting our dollars around in wheelbarrows. There’s no doubt that the purpose of $1.9 trillion stimulus package that just passed is intended to support asset prices—but that was the whole point, to fight DE-flation. The risk is that the economy was already recovering, and that the effect of the stimulus will overheat the economy.

According to the Congressional Budget Office, the gap between actual and potential economic output was already expected to shrink from $50 billion per month at the end of 2020 to $20 billion per month by the end of this year, while the new stimulus hitting the economy starting this month will total about $150 billion per month. That’s a lot of dough. As Beavis and Butthead said during the Super Bowl, that’s just a big, giant crack in the ice. So, yes, there will almost certainly be some inflation. However, I still think it’s hard to make the case that the impact of the stimulus will be permanent. Government being government, there is plenty of uneven and probably unnecessary spending in the law. However, step changes in consumer outlooks are rare—most American families of four would welcome a one-time payment of $5,600; few would make permanent changes to their earnings and savings expectations because of it, and that’s what a step-change in consumer inflation expectations requires. On the other hand, the price inflation that seems more likely to occur might just be in the financial markets.

So, yes, commodity prices and currency alternatives such as metals and crypto could continue to shine for some time, and we are all interested in preserving our purchasing power, which is what these asset classes purport to offer. I would just submit that owning businesses that have durable pricing power through brands or market position achieves the same goal. A Coke is a Coke and an iPhone is an iPhone whether you pay for it in dollars, euros, oxen or ethereum. Sometimes the best solutions to newly emerging questions such as inflation are right in front of us.

A year ago, the answer to the Once In A Lifetime market was to not panic. It’s reasonable to believe that approach will continue to work this year as well.

Same as it ever was, same as it ever was.

Same as it ever was, same as it ever was.

Same as it ever was, same as it ever was.

Same as it ever was, same as it ever was.

Any opinions are those of Burke Koonce and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Burke Koonce is a financial advisor at Raymond James & Associates, Inc., member New York Stock Exchange, member SIPC.