The Dreaded Snowplow

Every year at this time, I find myself reflecting on my favorite Christmas memories.  Christmas lights, midnight mass, eggnog, and shoveling snow.  What??  Shoveling snow??  Let me try to explain…

It was Christmas day 1978, in our Norman Rockwell town of Herkimer, NY when Old Man Winter dumped 24” of snow in one day.  Two feet of thick, wet, very heavy snow.  Early Christmas morning, with my siblings, cousins, aunts, and uncles, still sound asleep, I went outside and began shoveling the driveway.  There was no logical reason why I felt compelled to do that, it was Christmas day, everything was closed, there was nowhere to go.  Nevertheless, I picked up a shovel and went at it.  About four hours later, exhausted and drenched in sweat, our long driveway was clear and ready for use.  Then, stealing defeat from the jaws of victory, the dreaded snowplow came by creating a massive wall of snow at the end of our driveway.  I had more work to do.  The lesson that day was this – Sometimes, setbacks occur due to forces completely out of our control.  But with a little grit and determination, challenges can be overcome.  The sheer challenge of shoveling that much snow was what motivated me to do it.

Later that evening my best friend and I put on our skis and traveled around town, helping motorists who were stuck in the snow, and visiting friends along the way.  We had a blast, assisting our neighbors and spreading holiday cheer.  There is always somebody to serve or encourage. 

For the record, I miss snow at Christmas, although I have no interest in shoveling two feet of it ever again.  Covid-Christmas 2020 is going to be tough on a lot of people who are isolated from friends and family.  The challenge for all of us is to find a way to connect and share fellowship and enjoy the Christmas spirit, remotely.    

Collectively, my sense is that we all want Santa to bring us a more normal year in 2021.  As we contemplate what that might look like, perhaps a pertinent question is this – What surprises are in store for us next year?  To answer this question, we must first identify the forces currently driving the economy and markets:

  1. Historically low interest rates
  2. Quantitative easing and ongoing government stimulus
  3. Relatively benign inflation

Let’s examine the sustainability of each one.

#1- Low interest rates

The Fed has stated numerous times that it intends to keep rates low until the economy has fully recovered from the Covid shut down, and until inflation is at or above 2%.  With the potential for higher taxes and more government regulation from the new administration, it is unlikely that economic growth will accelerate enough in 2021 to lead to higher inflation.  Given this outlook, low interest rates are likely to continue in 2021.

#2 – Quantitative easing and ongoing government stimulus

At least one more stimulus bill is likely coming in early 2021, perhaps more than one.  For better or worse, we are in the mode where government is becoming more involved in managing the economy.  While this can have some benefit in the short run, the major concern is the ever-growing deficit.  It’s difficult to gauge when the deficit will finally drive inflation and interest rates higher, which is what most pundits have been predicting for quite some time.  It is definitely an area we will be monitoring closely going forward.

#3 – Relatively benign inflation

There are several powerful forces keeping inflation below the Fed’s target of 2%.  Demographics, productivity, technology, slack in the economy, and global competition, all play a role in keeping inflation under control.  My sense is inflation will remain benign in 2021, but again, it bears watching very closely.

#4 – Continued economic recovery from the shutdown

Corporate earnings are forecasted to grow next year between 5-10%.  As we have seen in recent years, companies that can achieve faster growth will be rewarded with expanding P/E multiples.  The “growth-scarcity premium” that has driven numerous stocks, particularly in the Tech Sector, will continue into next year.

In summary, it seems logical to assume that these four driving forces will continue in 2021.  At the same time, I suspect there will be a few unpredictable events and developments that upset the apple cart.   Our investment team will continue to employ valuation discipline and prudent risk management while being ever vigilant for the dreaded snowplow.

Merry Christmas and Happy Holidays to all.  

Michael Kayes, CFA