Pro Perspectives 12/21/20

December 21, 2020

A year ago, as we were approaching a new year, we talked about the prospects of seeing another late 90s type of boom for the economy and the stock market. 

The big theme that paralleled the late 90s boom: An overly aggressive Fed that was tightening into a low inflation, slowly recovering economy. 

That's what we had in 1994.  That's what we had in 2018.  

What happened in '95?  The Fed was forced to do an about-face, and by July they were cutting rates.  Same thing in 2019, to the month, the Fed was forced to stop tightening and start aggressively easing again. 

What happened to stocks, and the economy in 1995.  Stocks went crazy, up north of 36% (including dividends).  And within three quarters of the Fed's first cut back in '95, the economy was printing above 4% growth.   

Similarly, in 2019, stocks had a huge year, finishing up 31.5% (with dividends).  And the economy was fundamentally strong, and set up for a big year, coming into 2020.  The consumer was in a very strong position.  Unemployment was at record lows.  Wages were at 11 year highs. Household net worth was at record levels.  Consumer credit worthiness was at record levels.  The amount of money required for consumers to service debt every month, relative to their disposable income, was near record lows (debt service ratio). And companies were producing record profits.  

Despite that setup, instead of having the first hot year for the economy in a long time, we've had the deepest economic contraction in history.

But, now we have visibility toward a fully reopened economy again.  And we have a massively stimulative fiscal and monetary backdrop.  Meanwhile, household net worth has already recovered to new record highs.  The debt-service ratio for consumers remains near record lows.  And as more people get back to work, we have a formula for a big 2021. 

Add to that, don't forget we have a very big "boom catalyst" ahead. 

Remember, the year 2020 was supposed to be the year that 5G (high-speed, omnipresent wireless internet) went mainstream. 

How big of a deal is 5G?  The CEO of Qualcomm said it will have a similar impact to the introduction of electricity. This is expected to dwarf the lifestyle changes we've seen in the first two phases of the internet.
It's a full-blown fourth industrial revolution.  Yet, while the global focus has been the pandemic, the 5G rollout has been, relatively quietly, underway.  The next two years are expected to be transformative for the global economy. 

This all sets up for something that still looks like a replay of the late 90s boom, when stocks did this …

Remember, that period too, was abound with economic shockwaves (Asian Crisis, Russian Default, the blow up of Long Term Capital Management).