January 2021
Investment Commentary

The renown British writer and theologian C.S. Lewis once said, "You can't go back and change the beginning, but you can start where you are and change the ending."  In many ways, this quote epitomizes the journey we have been on over the past year.  While the first few months of 2020 began with an unforeseen global pandemic that ultimately led to over 350,000 deaths in the US and close to 15% of all American workers losing their jobs, we, as a society, have also actively “changed the ending” of this crisis.

We leaned on the strength of our families as over 24 million Americans provided some form of financial aid to their adult children and countless others acted as at-home teachers to their younger children. We leveraged countless technological advancements to allow many of us to work from home and, in doing so, changed the traditional view of a work/life balance, and we have cheered the incredible achievements of human ingenuity and science as some of our largest pharmaceutical companies came out with vaccines for  COVID-19 that have been over 90% effective.

But as we reflect on the past few months, perhaps with some exhaustion and a tinge of optimistic appreciation, we must also acknowledge that, as investors, we are now living in a world that in certain ways looks very different today than a year ago.  In that light, our Investment Team here at Glen Eagle set out to identify three of the major themes that will impact investment portfolios in 2021 and beyond:

  • Pent Up Consumer Demand: During recessions (such as in 2008), the government will send stimulus checks to individuals in an effort to offset the effect of higher unemployment and incentivize people to go out and spend money (since consumer spending is 70% of the US economy).    With businesses closed and many individuals afraid to go out in public, Americans do not have as many spending opportunities. This is why we saw more than 80% of stimulus-check-recipients use the money to either pay down debt or increase savings.  Additionally, the temporary increases in unemployment benefits that Congress approved throughout this pandemic have resulted in 50-75% of out-of-work individuals earning more money than when they had a salary.(1)
    • INVESTMENT IMPLICATION: Due to the government’s stimulus efforts, the financial health of the average American household has improved during the pandemic.  As we return to some form of “normality,” we expect to see a large increase in spending due to pent-up demand. Historically, in this type of environment, investors would increase their exposure to the “consumer discretionary” sector. Today, however, Amazon, Tesla, and Home Depot compose 54% of this sector.(2)  Since these companies have benefited immensely from the quarantine, they may not be as attractive to investors looking to invest in companies that will benefit more from an “economic re-opening.”
  • Growing Focus on International: The US has been the most attractive market over the past few years for three main reasons.  First, it has been viewed as an area of safety where investors can go when there appears to be uncertainty about what is happening in the global economy.  Second, the US previously had higher interest rates than Europe and Japan which meant investors could earn a higher yield on their money.  Third, the American stock market includes some of the most innovative and technologically advanced companies in the world.  As we emerge from the pandemic, the first two attractive characteristics of the US market (i.e., a safe-haven, and higher interest rates) are no longer relevant since the Federal Reserve has dropped the interest rate down to near 0% and the global outlook no longer looks as uncertain or daunting with vaccines currently being distributed.  Additionally, the US government has increased its debt load by over $3 trillion to try to offset the negative impact of the pandemic.  
    • INVESTMENT IMPLICATION: Although we believe the US stock market is still one of the strongest in the world, we also acknowledge that investors are starting to shift some of their attention to international markets where they can find innovative companies.  As this trend continues, we expect to see international markets outperform.  When you consider the fact that the largest American corporations generate a significant amount of their revenue internationally (i.e., a “revenue-exposure” analysis) most American investors only have around 50% of their portfolio exposed to the US market.(3) As a result, we recommend only making small additions to a portfolio’s international exposure.  
  • Lack of Return in Bonds: As we discussed in our recent webinar, the current interest rate environment poses a predicament for bonds.  This is because bond prices are inversely correlated with interest rates.  This is problematic since interest rates are near 0%, meaning they really have nowhere to move but upward over the next several years (causing bond prices to fall).
    • INVESTMENT IMPLICATION: Bonds are still significantly more conservative and substantially less volatile than stocks.  Additionally, they generally provide stable and recurring income for those in or close to retirement.  It would, however, make sense to diversify the conservative portion of the portfolio to include other assets beyond just bonds. The overall goal of this group of investment assets should always be to add diversification and protection to your portfolio compared to traditional stocks.

As we close this newsletter, we are keenly aware that while we are more opportunistic regarding our investment outlook over the next several years, there are still many challenges ahead of us.  As a nation we will need to face the consequences of this crisis whether that be related to the 9.8 million workers currently still unemployed, the wealth gap which has accelerated rapidly in the quarantine environment, or the immense amount of national debt we are now burdened with.  These challenges will no doubt force us to adjust and adapt as both individuals and investors.  Here at Glen Eagle, we are confident, now more than ever, that we will always continue moving forward.

Wishing you and your family a healthy, happy, and prosperous start to 2021,

The Glen Eagle Investment Team

1.The Wall Street Journal “Yes, It Is Possible to Have Too Much Stimulus” 2. Barron’s “It’s Best to Think Small When Playing a Rebound in Consumer Spending”  3.The Federal Reserve “Globalization and the Reach of Multinationals Implications for Portfolio Exposures, Capital Flows, and Home Bias”

Disclosure: This commentary is furnished for the use of Glen Eagle Advisors, LLC, Glen Eagle Wealth, LLC, and their clients. It does not constitute the provision of investment advice to any person. It is not prepared with respect to the specific objectives, financial situation or particular needs of any specific person. Investors reading this commentary should consult with their Glen Eagle representative regarding the appropriateness of investing in any securities or adapting any investment strategies discussed or recommended in this commentary.