July 1, 2021
Dear Clients & Friends,
As we continued to recover from the COVID-19 pandemic in the first half of 2021, the economy made significant progress and the equity markets advanced remarkably higher. This special mid-year edition of my client letter to you is divided into two parts. First, is a brief recap of our guiding investment philosophy and core beliefs; second, is my perspective on the current economic environment. As always, I welcome your questions, comments, and feedback.
We are long-term, goal-focused, planning-driven investors. We firmly believe that the best course is to formulate a financial plan—and to build investment strategies—based not on a view of the economy or the markets, but on our most important lifestyle and financial goals.
Since 1960, the Standard & Poor’s 500-Stock Index has appreciated approximately 70 times; the cash dividend of the index has gone up nearly 30 times. Over the same period, the Consumer Price Index has increased nine times. Historically speaking, mainstream equities have been an extremely effective hedge against long-term inflation and a powerful generator of real wealth over time. We believe this is more likely than not to continue into the foreseeable future, hence our investment preference of owning successful companies rather than lending to them.
We believe acting continuously on a sensible plan—rather than reacting to current events—offers us the best chance for long-term investment success. Therefore, we do not believe the economy can be consistently forecast, nor the markets consistently timed. The most reliable way to capture equity market returns is to ride out their frequent but ultimately temporary declines.
The performance of our investment portfolios relative to their benchmark is largely irrelevant to our investment success—it is also a variable over which we ultimately have no control. The only benchmark we care about is the one that indicates if we are on track to our most cherished life goals.
The American economy continued its dramatic recovery in the first half of 2021, driven by the distribution of effective vaccines against COVID-19 and the retreat of the pandemic, massive monetary and fiscal accommodation, and its own deep fundamental resilience—which should never be underestimated.
The S&P 500 ended the first half at 4,298, an increase of 15.24% from its close at the end of 2020. Coming into the year, the consensus earnings estimate for the Index in 2021 was around $165; as of now, the consensus for the next 12 months has reached $200 and may still be revised higher.
The economy continues to struggle with supply chain imbalances, as well as with a historic divergence between the number of job openings available and continued high (though rapidly declining) unemployment. The chattering class of pundits and financial journalists continues to speculate on when these blockages will clear; but the key thing to remember is they will be resolved in the fullness of time.
We are still in the midst of an unprecedented experiment in both fiscal and monetary policy; for which the outcome remains impossible to predict. The possibility that we have overstimulated the economy was highlighted this spring by a significant resurgence in inflation. However, recent statements by Fed Chair Powell and Governor Bullard indicated a keen awareness of this risk, and a readiness to act against it. The markets evidently took these officials at their word, as inflation hedges like gold and oil sold off sharply, the equity market pulled back modestly, and the yield on the 10-year U.S. Treasury note retreated to around 1.50%. We do not want to read too much into these short-term events; but it appears the Fed knows its credibility is truly on the line here.
There is also the issue of the Biden administration’s fairly radical tax proposals with respect to capital gains and estate taxes. The best that can be said on this subject is that the momentum behind these initiatives seems to be fading—but we need to wait and see how it all plays out.
Nonetheless, for investors like us, I think the most important economic report of the first half of the year came just a few days ago. It was that household net worth in this country spiked 3.8% in the first quarter of 2021—to $136.9 trillion—propelled by broad gains in the equity market and in home prices. Perhaps, even more important is the fact that the ratio of household debt to assets continued to shrink and is now back down to about where it was 50 years ago.
The consumer powers this economy, and the consumer has rarely carried more manageable debt levels relative to disposable income— and has simply never been holding more cash—at any point in modern history. In June, the National Retail Foundation raised its outlook yet again; it now expects retail sales to grow 10.5% to 13.5% (that is, $4.44 trillion to $4.56 trillion) year over year. Just this past month, the retail giant Target raised its dividend by a whopping 32%.
On February 19, 2020—the market peaked just before the pandemic took hold—the S&P 500 closed at 3,386. It then proceeded to decline 34% in just 33 days, amid the worst global health crisis in a century. But if you bought the Index at that epic top and were still holding it on June 30 of this year, your total return with reinvested dividends has been close to 28%. I’ve never seen—and don’t expect to ever see again—a more vivid example of Peter Lynch’s saying that “The real key to making money in stocks is not to get scared out of them.” One of my most important responsibilities as your financial advisor is to make sure you do not get scared out of stocks.
As always, thank you for being my clients. It is a privilege to serve you.
Nicholas J. Enzweiler is a registered representative with, and securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Strategic Wealth Advisors Group, a registered investment advisor. Strategic Wealth Advisors Group and Mercer Partners Wealth Management are separate entities from LPL Financial.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of July 1, 2021.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.