Look Farther Out Than The Near Term

Brett Langer |
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By: Brett R Langer

As investors, there are traps we can find ourselves in. I think right now it’s very important for investors to find the time zone of their investments. To simplify, I think investors tend to view times zones as immediate or near term, intermediate short term of one to two years, and lastly long term which would be five years and longer. In our opinion, we are focused on the intermediate short term of the coming 12 to 18 months. We think there is a large pitfall if we pay too close attention to what is happening right at this moment.  In regards to the long term, we can see huge restructuring in our country based on how we are dealing with this pandemic. It is uncertain how the restructuring is going to look, so in our opinion it’s too hard to invest that far out today.

The first thing we need to do to invest out for the coming year or two, is to digest our current fundamentals that we have or don’t have in our current economy.   Here is a big number for you to start out with.  In the third quarter that ended in September 2020, we saw our GDP grow at 33% which is the largest quarterly increase ever. Eighty percent of the companies reporting their earnings actually reported better earnings than expected.  Eighty percent of the companies also increased their forecast for the next quarter. Retail sales in October increased and are higher by 5.7% more than a year ago.  Personal consumption increased by 7.7% from a year ago. They just spent differently. Instead of spending money on travel, sporting events, and restaurants, consumers bought goods such as appliances, cars, boats, outdoor living spaces, etc.  Personal incomes in October rose 6.2% from a year ago. In October we added 638,000 jobs and our unemployment went down to 6.9% from 14.7% in May of this year.  The private jobs report was better than the 638,000 increase because our government shed over 200,000 jobs. 

Needless to say, our economy isn’t perfect right now. If I chose to invest only off of what is happening right now, I think I wouldn’t want to invest. Divisive elections, still no stimulus bill, rising COVID-19 cases, more lock downs, continued rioting, government deadlock in Washington DC, and an intensely divided country makes it hard on everyone.  If I focus on all of this too much, I’ll turn from being an investor investing for growth to an investor expecting all of this to turn our economy inside out. Again, if you only focus on the near term, you are likely to make a very large mistake and discount the fundamentals that are occurring and what likely is to happen next year.

Let’s turn our focus on the next twelve months. Our economy has large sums of monies that are being lent out into the economy today at very low interest rates.  This is one reason why we are consuming more and will continue to do so next year. Savings rates in this country are the largest they have been in decades.  Debt to income ratios are at very low levels also not seen for decades. Professional people, in general, are not losing their jobs. The remodeling industry has NEVER been better or busier. Today, we have consumed more than what we have a supply of.  Go try and buy a new RV, boat, or appliances.  We need to catch up with demand and still produce more so that we have inventory levels again. Contractors are in short supply today. Housing starts are up by 14.2% over last year and it is still not enough for the demand.

Here is a clue about investing. It’s best to look out for the next year and with probabilities, project what is most likely to happen.  There is a very high probability that next year we will have a highly effective vaccine to finally turn the corner on the pandemic. By the end of next year, the probability of returning to somewhat normal life is high. I think we will have pent up demand to consume everything that we haven’t over the past six months, once we feel it’s safe.  There is a very large probability we will get another stimulus bill by spring. Although the probability is lower, there is a good chance we will get an infrastructure bill next year as well. After these past elections, our congress and senate are very split no matter who controls both. It means it’s just that much harder to legislate things, but infrastructure generally gets support from everyone.

Lastly, consequences of how we handle this pandemic is very far reaching. It’s almost impossible to invest what will happen in five years from now. Today, thousands are moving out of homeless, riot filled, locked down cities for Idaho, Arizona, Texas, Utah. Some of these places do not have enough homes to sell.  Microsoft is giving many employees an option to take less pay and work from home moving forward. Our economy has already shifted to lock downs, which is why going into more lock downs now will not hurt as much as it did last March.  It also means we will have less smaller companies and more larger companies. 

At our firm we want to pay attention to what’s happening today, but only to help us define where we think money can be made in the next year or two. Even though the news mainly focuses on new Covid cases, it’s been lost that we currently are sitting on the fastest economic recovery in history.  There is a good chance it can continue to be so moving forward.  There will be some head winds along the way which we should embrace. Those headwinds put investors in check so not to get too carried away and also help businesses generally improve and get stronger. 

I think 2020 for most of us will go down as a very difficult year.  On behalf of our family here at The Summit Financial Strategies, we are very thankful for you and it’s our heart to do our very best for you and your families, as we all continue to battle and navigate these times.