Striving to Consistently Outpace The S&P 500 Index
0% Management Fee, Performance Fee Only.
2021 Outlook
As you may know by now, I do not spend much time on predictions in the short term regarding the market. However, we have some unique circumstances in the market that could give us some clues to how 2021 could shape out. At the current moment, there seems to be a great deal of cash on the sidelines. This cash typically comes from three sources: cash on hand, credit, and income. As of end of Q3 2020, the four major banks in the US were sitting on more deposits than ever before and considerably higher than in 2019. Below is a comparison of 2019 vs 2020 in trillions of dollars.
1) JPMorgan: 1.5T vs 2.0T
2) Bank of America: 1.4T vs 1.7T
3) Wells Fargo: 1.3T vs 1.4T
4) Citigroup: 1.1T vs 1.3T
Banks at the moment are offering anywhere between 0.01% to 0.08% on savings accounts. Customers seem to be accepting the deal for now. We have to assume it is because most people are uncertain of their job status given the Covid-19 pandemic. Another piece of evidence that cash is sitting on the sidelines is the U.S. personal savings rate. It hit an all-time high in April 2020 of 33.7%, but has since come down to 14%. For some perspective the usual savings rate during “normal” times is about 6% to 7%. Moving to the second component, the head of the Federal Reserve (Jerome Powell) has stated that the Fed will keep interest rates at rock bottom levels for at least the next two years. Interest rates act like gravity on stocks, the higher the interest rate the greater gravity pull down on stocks. It will be difficult for investor to get any meaningful yield from fixed income to keep up with a target inflation rate of 2% let alone a decent return. The third component that I think will give some tailwinds will be assumed gridlock in Washington. If Republicans are able to hold on to the Senate (2 seats up for grabs in the state of Georgia. Democrats must win both seats for a 50/50 split, at which point the deciding vote would be cast by the Vice President), you will most likely see little progress on meaningful tax reform. Tax reform heading into the elections was the one major issue Wall Street seemed to be concerned over.
To that end, with a great deal of cash on hand, interest rates remaining at near 0%, and gridlock in Washington, one could believe that the future looks bright for stocks. The real question is when will the consumer come back to normal spending habits and reduce their cash on hand. This will be the key driver, but nearly impossible to predict. Driving that behavior will be the availability of the Covid-19 vaccine to the US population (best estimates are between March and May), people feeling safe taking it, and finally world wide availability and acceptance. It can also be said that the good news may already be baked into the market, though again, impossible to predict. As always, the most important factor is making sure the stocks that one owns are undervalued or fairly valued. What an investor pays for a stock is always critical.
Track Record
To view track record, please contact Greg Cavallini at greg@cavallinicapital.com.
0% Management Fee, Performance Fee Only
Notes:
The record above displays Cavallini Capital’s track record since inception on July 1, 2017.