Midyear Economic Outlook

Shane Tenny, CFP®, partner at SDT, shares his take on the midyear economic outlook for 2021. He touches on the following themes:

-Impact of COVID-19 on the economy

-What's going on with inflation

-Significance of shift to WFH on the economy

-Growth in e-commerce and online shopping

Transcript:

SHANE TENNY: Hi there. My name is Shane Tenny and I'm Managing Partner at Spaugh Dameron Tenny, and I have the privilege of being the chair of our Internal Investment Policy Committee and thought it'd be high time that we bring you a 2021 Mid-Year Economic Outlook. You know, as I prepared for the conversation today, I was reminded of the video I recorded about 15 months ago in March of 2020, kind of in the teeth of the COVID or the coronavirus pandemic, as we called it.

Then the market was down about 30%. And I used the phrase that I'd heard elsewhere that I felt like we could see across the valley, even through the fog and darkness. And certainly there were a lot of things that were really unknown and bizarre then. But given the strong position that our economy was coming from, I believed and many of us believed that we could see across the valley to the other side not knowing how long it would take or exactly what it would look like. And in fact, that seems to be where we are now. Certainly, 2020 was about as bizarre a year as many of us have ever lived through.

And 2021 is bizarre for different reasons. But there has been progress. And that's some of what I want to show you today, the progress that's been made, how companies are adapting, and what opportunities exist. With that said, I'd be remiss if I didn't start by just highlighting the modern medical miracle that we have witnessed. As I look through information, I'm struck by both the speed of remedy and vaccine and the collaboration that took place. And I want to take a minute and just put that in context for you.

As I look at research around illnesses like typhoid fever, which ravaged the globe for a hundred years, killing millions. Did you know it took 105 years to develop an effective vaccine for typhoid fever? It took almost half a century to develop the vaccine for polio, which many of you wear the badge of on your arm from being vaccinated as children. The vaccine for chickenpox, which affects so many children and certainly did when I was growing up, took 42 years to develop. You'll remember about a decade ago, Ebola was ravaging Africa, a very grotesque illness that cost many lives. And it took 42 years to develop an effective vaccine for Ebola, which was just completed a couple of years ago.

And yet in less than 12 months since the Chinese scientists published the virus's genome for COVID, Pfizer and Biontech were able to receive U.S. approval for the vaccine. In fact, one of the portfolio managers at a research firm that we are connected with, Capital Group, said that in terms of the collaboration that took place to create vaccines for COVID, the vaccines were developed by a Turkish couple leading a German company partnered with a U.S. multinational firm led by a Greek immigrant with a Scandinavian chief scientific officer. So I call it nothing short of a modern medical miracle. I'm not sure what you would call it, but it's been profound and has allowed the economies around the world and in fact, most of our lives to begin returning to normal.

So with that said, let me do a little bit of a screen share with you here and I'll give a shout-out to our friends at Capital Group for helping with some of the visuals here. You can see on this first screen what we're calling the boom heard around the world. And it started, the boom started as a storm cloud last year with COVID. But what we are absolutely seeing now is those storm clouds lifting as life begins to return to normal. And undoubtedly, there's hotspots around the country and hotspots for COVID around the world. But, following the contraction of the U.S. economy by about three and a half percent last year.

In the first quarter of 2021, the International Monetary Fund was forecasting U.S. GDP to grow at about 3.1%. And by late March, early April, they were revising and almost doubling those growth projections to what you see here, 6.4% forecast growth for this year as the stimulus, as the economic support that policymakers and governments provided is assimilated into the system. And even after this year's significant growth, we still see into 2022 and beyond very respectable GDP numbers of three, three and a half percent growth going forward. It's super encouraging. And you can see this being carried forth really throughout the globe in eurozone developed companies or countries and in emerging markets around the world.

Now, with this said, we know there was a lot of capital in the U.S., 2 to $3 trillion that was made available, and consumers and companies have largely been sitting on it. You see the chart on the left there, the cash for corporations or the consumer savings rate corporations sitting on almost three and a half trillion dollars. And now we are absolutely seeing that start to flood the system. People are beginning to spend.

I heard yesterday the CEO of Delta Airlines say that their domestic leisure travel has returned to 2019 levels. We see the reservations made through open table have experienced strong rebounds. And so this stimulus that was provided, the COVID stimulus, has kind of intersected with pent-up demand. And now the repressed supply that came about as manufacturers and other corporations had to limit their production or were forced to based on shutdowns.

And so we're getting this kind of rocket ship type of growth, as I showed in the previous slide of about six and a half percent of GDP this year, but still strong, forward-looking growth potential. One thing that a lot of folks are asking about, well, is the market getting too hot or is there a bubble that's about to burst? And certainly one of the most common ways to measure kind of market valuation is what is called a price-to-earnings ratio. The interesting thing about this price-to-earnings ratio or the p/e ratio is that often people will just look at the price of stocks and say, oh, the Dow Jones is at 35,000 or this stock's trading at this. This is an all-time high, therefore, isn't it about to burst and we forget or it's not as easy to understand and interpret what the earnings are so that the e part of a p/e ratio is really, really important.

And it is true that prices are high now. The stock market is high, but so are earnings. And so what we see is the S&P 500 companies reporting or forecasting about 20% growth in earnings for 2021. So while p/e ratios are high, so are earnings. With that said, if we forecast one more here, we know that in the face of COVID through the second and third quarters of last year. A lot of industries that have typically been fairly resilient in times of economic volatility, energy, utilities, and banks were absolutely crushed as a frame of reference. The overall market was down about 34% by April of last year. But then we had Vaccine Day on November 9th, 2020, as when the US government announced that the vaccines were going to be approved or viable and safe to use.

And so there's been an enormous resurgence in most sectors. And with that, what we've seen is this macro-level trend called WFH or work from home. And so if you look at kind of work-from-home statistics pre and post-COVID, what we know is that before COVID, about 5% of workers worked from home on a regular basis. What we know now is it's about 25% of the American workforce is working from home. And certainly in some industries, it's much, much higher than that in white-collar and service sector industries. But this work-from-home shift in behavior for consumers and companies is causing really unique opportunities for home building as people can now work from anywhere.

And so one of the trends that is being watched is will consumers move more into the suburbs? Will there be a macro level shift further from center cities since commuting is no longer as critical? What about cybersecurity for corporations, investment in technology, investment in clean energy, and investment in renewables? What does the forecast look like for commercial office buildings? What is the forecast look like for Starbucks if there's less people driving by to go into the office? And so this overall work-from-home shift is absolutely bearing out in pretty significant ways.

What we see here is a couple of different industries e-commerce, telehealth, streaming, and cloud computing, and kind of again, pre and post-COVID, what's that penetration within that sector? So for example, digital payment technology was about 9% of transactions in 2019 and grew about 66%. So this e-commerce was about 15% or I'm sorry, the digital payments there, one in four of the economy at the end of 2020. Telemedicine there, the second-row adventure, I guess that none of us had done a telemedicine visit prior to COVID. And because of the required change in seeing patients, it represented about 20% of all visits last year.

So we're always aware of the risk and the pain of crises, which COVID has certainly been one of the largest. But there's always opportunity in crisis. I was speaking last year with an executive at a large hospital system, and as they had to react to the COVID crisis and were implementing virtually overnight telehealth services, he said, Shane, In three weeks we've accomplished as more regarding telehealth than we've been able to do in the last four years. And so it's that kind of shift and that kind of an adaptation that we are seeing corporations make.

There's huge shifts for PayPal, for MasterCard. We even see retailers like Williams-Sonoma and Target really ramping up their payment, their online presence, their technology, and their distribution. And I would say that while there's a lot of headlines around kind of digital companies, your Amazon, your Tesla, etc., the stalwarts need to be paid attention to because there's tremendous opportunity. And so use Tesla as an example. Obviously, they're the headline around electric vehicles and they've sold a couple hundred thousand. But very soon in here we're seeing Volkswagen, General Motors promising to roll out an electric Hummer, a Ford promising in early 2022 to begin rolling out an all electric version of the number one selling vehicle in the globe for the last 44 years, the F-150.

And so while everyone is enamored by Tesla as the shiny object, what's going to happen when huge established distribution powerhouses like Ford, General Motors, Volkswagen begin to enter that space in another area? Again, Amazon, of course, is showing up on all our doorsteps daily. But you know, who else is is not giving up without a fight is Target, Home Depot, Costco, all making significant advances in their distribution models.

And on here, we've got the streaming services. Certainly Netflix comes to mind, number one. But you know who is rapidly overtaking? Netflix is a tiny little upstart from late 2019, Disney Plus. And so it's exciting to think about Netflix and Hulu, but the Goliath of Disney has come in. They were hoping to secure 50 million subscribers within five years. They're already across the 100 million subscriber mark as people are logging in to watch Star Wars and Pixar and Marvel movies. So there's tremendous opportunity with this work-from-home shift and the digital shift.

In fact, speaking of digital, I'd be remiss to not talk about semiconductors. Semiconductors, and that business which powers everything from the phone in your pocket, probably to the watch on your wrist, to the screen you're watching me on, to the car that you want to buy. These chips, semiconductor chips are expected to power the next decade, just like oil and coal powered the industrial revolution. Semiconductors across the globe are about a $450 billion business and is expected to be $1,000,000,000,000 business over the next year.

In fact, here's a little fun fact as a side, try googling sand shortage. Yeah, sand shortage. Like on the beach. Who knew? There's a shortage? But you know what sand is used in? Well, it's definitely used in concrete, which is being needed all around the world to create pavements and buildings and things in the U.S. and in China and in India and around the world. Sand is also used in every piece of glass that's created fiber optics. The glass on the face of your watch, the glass through the screen you're watching me on. But in all this, it's important to keep an eye not just on the newcomers, but on those companies who are established.

And one of the beautiful things as an equity investor is when you can find high-quality companies that also pay a growing dividend. Now, many firms through last year cut their dividend, which is often the case in a recession, to shore up their balance sheets. We're already seeing, as you can see on the chart on the left, there are 76 companies reinstating their dividends. And dividends are not just the purview of your Ford Motor Company or Exxon, your Coca-Cola, finding companies that not just pay a dividend but can grow their dividend. You definitely want to look around the globe.

And so the chart on the right, kind of the dividend snowman, I call it, we see that there are 87 companies in the U.S. that have dividend yields higher than 3%. But there's over 600 companies around the world that you can look at to generate equity-based income. And that's really important as part of a portfolio, particularly for those of you who are getting close to retirement or want the dividend stream in a portfolio to help hedge against inflation, market volatility, interest rates, things like that. Which brings up an important question and perhaps one of the the most common ones these days, at least encouraged by our financial journalists.

And that is the fear over inflation and interest rates. You know, if you've tried to build a deck or remodel your house or buy any lumber or building supplies, you know, prices are through the roof. If you've tried to buy a used car, those prices are through the roof. And so there is definitely a rise in prices versus last year. And currently that inflation rate cyclically is about 5%, which is as high as it's been in I think the last eight or nine years. The question is, is this going to persist? Are we looking at 5% inflation of inflation for the next ten years? And most economists don't think so.

Historically, it's not unprecedented to have a surge in commodity prices. You know, your lumber, your copper, your cotton, rubber, zinc following a recession. But often that doesn't translate into core inflation through the Consumer Price Index. And so you can see that the spike here on the chart and there is definitely the expectation by the Federal Reserve for one, that this will peak and begin to normalize as we move through 2022, as employment recovers and as the stimulus funds from COVID relief are kind of absorbed into the system and supply chains resume.

So as I said before, kind of that we've got the perfect storm of the vaccine demand, the pent-up demand that consumers have from not spending through 2020, along with the COVID supply chain issues kind of causing this inflation. But overall, it is expected to kind of normalize through next year, as evidenced even yesterday in Jerome Powell or Jay Powell's comments to the House of Representatives that they continue to expect that there will be no change to inflation rate or to interest rates until at least 2023.

And so this is good news if you're wanting to borrow money or refinance some loans. Interest rates should stay nice and low for the next 18 months or so. Of course, that's bad news if you're a saver or investor, your cash isn't really going to earn anything. But this does give some indication of what the Fed is expecting and kind of what the coming, you know, 12, 18 to 24 months might look like in terms of equity markets and fixed income savers.

I hope this is helpful to you in terms of just overall economic outlook. But as always, I want to remind you that what is important to you and your family isn't just the economy, but it's your economy. And so if any of this information raises questions in your mind, if you need advice or need guidance or want to know how to impact your economy in a way that's meaningful and constructive for your family, by all means, don't hesitate to reach out. That's what we're here for. Thanks so much for your time today. I hope this was helpful. And tune in soon next time for our next video.