PODCAST: A Brighter Future with Laidlaw, Episode 33 – DJIA 30,000 A Sign Of Animal Spirits, But Will Russell 2000 Take Wing In 2021?

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In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, discusses the importance of DJIA 30,000, whether further fiscal stimulus is required for another market move higher, the factors behind gold selling off from August 2020 highs, how market internals favor the Russell 2000 for 2021 performance, and takeaways relative to Janet Yellen being nominated for Treasury Secretary.

The topics discussed in this episode are: Just how significant was last week’s move to DJIA 30,000?, What are the odds on another major fiscal stimulus program from Congress?, With interest rates low, why has gold sold off?, Looking ahead to 2021, what do market internals tell us?, and Would Janet Yellen make for a better Treasury Secretary? 

Please tune in for more timely insights.


Hello and welcome to another episode of “A Brighter Future,” Laidlaw & Co’s Podcast Series. I’m Rick Calhoun, CEO of Laidlaw Wealth Management, and once again I am joined by David Garrity, Chief Market Strategist for Laidlaw & Co. 

David, I hope you had a happy and, of course, socially distanced Thanksgiving. 

Rick, the holiday was as suggested a small and intimate family gathering in which the spirit of gratitude was shared, but not the infection of the day. Without the expectation that guests would soon arrive, we all had the chance to settle in and spend time together in conversation and remembrance. Over the weekend, we had the chance to visit the cemetery where my father’s family lies at rest and recall how they had come together to survive the Spanish Flu epidemic. Good lessons of commitment to each other, service to others and perseverance to always remember and not lose sight of, especially now.

Question 1:

So, David last week we saw positive coronavirus-vaccine news, which helped propel the Dow Jones up more than +12% for the month, crossing the 30,000 mark for the first time, and on track to have the best monthly gain since January 1987 while the S&P 500 and Russell 2000 both posted fresh record highs.   Economic data releases were light, putting the emphasis on the high-wire act investors are walking between positive vaccine news and rapidly climbing COVID-19 cases and hospitalizations. 

But the question I want to start with today is Dow 30,000: Symbolic or Significant?  While “Dow 30,000” has a nice ring to it, the underlying factors that have gotten the market to this level are more significant than the number itself.  So, what does this number mean for investors?

Rick, as the Dow Jones Industrial Average is not a performance benchmark for institutional investors of anywhere near the magnitude of the S&P 500 index, the effect of its recent rise through the 30,000 level is more psychological than anything else. That said, animal spirits are just as important in supporting market advances as economic data and corporate profits. 

So, we will consider the development to be a further positive confirmation of a return of optimism to the stock market as investors look across the chasm opened in the economy by the COVID pandemic as the bridge offered by accommodative monetary policy, record fiscal stimulus and now the discovery of vaccines supports the prospect of a better economy in 2021.  

Question 2:

David – last week’s momentum was anchored on three developments that appear to have  given investors confidence the ill-effects of the pandemic may soon be mitigated, and the socio-economic stormy weather will be changing to calmer seas ahead:

First –  Pfizer, Moderna, and AstraZeneca all announced preliminary “high positivity” results 

in the quest for a vaccine. Pfizer officially asked for FDA emergency approval under the 

auspices of the Federal Warp Speed program. Should this and others follow we should 

have inoculation available in late December – early January, and public availability 

by March.

Second, we have indications there will be a smooth transition of power as the GSA approved President-elect Biden to start transition talks with federal agencies. While this belongs in the political venue, a smooth transition gives confidence to markets that all  essential stimulus programs will continue to operate effectively.

Third and finally, as long as both parties continue to cooperate on the transition phase, we can avoid a budget crisis as Congress has to pass a continuing resolution to extend the current one that expires December 11. Again, leaving politics aside, we need to resolve funding the unemployment benefits approved in the Cares Act and expiring on December 11. Failure to do so has economic consequences as we continue to grapple with a 6.9% unemployment rate.

However, while those three developments are good this is not a stool, it’s a chair and we need that fourth leg.   Everybody agrees we need a fiscal stimulus package to mitigate the ill effects of the pandemic, and the rising tide of jobless claims, but this “fourth leg” requires Congress to do their job. Do you believe Congress will do something on a piecemeal basis?   If not, does that present short-term risk and volatility for client portfolios?  

Rick, seeing how the relationship between rising financial asset prices and liquidity provided by fiscal and monetary stimulus has been amply demonstrated during the COVID pandemic, it is hard to argue against the need for further fiscal stimulus not just domestically, but globally as well. 

As you state, weekly unemployment claims have been moving higher as the third wave of COVID infection has been sweeping across America and in the process fulfilling the predictions of health experts such as Dr. Anthony Fauci who warned that the onset of cold weather would bring substantial risk of increasing infection and mortality. 

While Congress is moving to provide extension to current unemployment benefit programs, there are still roadblocks such as the current administration’s insistence on receiving a further $2 billion for its southern border wall. Talk about obstructing progress when people need it most, but following the recent election the political climate remains highly partisan to everyone’s mutual detriment. 

To me, it is clear that American democracy needs a new deal in order to move forward, but it appears that unless both of the Senate run-off elections in Georgia coming in early January favor the Democrats the prospect is for piece-meal action at best. To cure what ails America now politically depends in large part on the ability of the incoming administration to prove effective in curing what ails America now physically. If it can do so, then it enhances the prospects for breaking the political barriers that impede the chances for rebuilding America better.   

Question 3:

David, strategists with many decades of experience normally think about gold in a certain way: as an inflation hedge and/or gauge. 

Investors also don’t really have a handle on what gold is or what it represents. Many erroneously believe gold is some sort of inflation hedge, because of our experience in the 1970s. It’s also not a hedge against stock market crashes, as we discovered in March. 

Gold is a hedge on government authorities making poor economic choices. Inflation is usually the result of those poor decisions, but people confuse cause and effect here. Gold is a hedge on policy makers screwing up, and there has been a lot of screwing up in the last 20 years.

Those who were around in the 1970s and saw gold hit $800 for the first time at the end of that decade, think back to soaring inflation and 30-year fixed mortgage rates well in excess of 15%. Then Paul Volker took the reins at the Federal Reserve and took away the “inflation punch bowl” The price of gold collapsed over the next couple of years and really didn’t find a bottom until 2001.   

But here we are today with gold trading around $1,800 per ounce with prices in early August  exceeding $2,000  All of this is, of course, while inflation around the world is at extremely low levels with some of the developed economies teetering on the verge of outright deflation at times.

So, we are seeing almost no inflation, but gold is trading at a record high.  So, I’ll ask the question many investors are asking, Why? 

Rick, as you mention, historically gold is viewed as a hedge against policy errors that result in rising inflation. Given that the Federal Reserve under Chairman Jay Powell has moved recently to relax its interest rate policy guidelines to allow for higher inflation rates, one might expect that gold would receive a material and sustained boost in its price level. 

This is further underscored by the likelihood of former Fed Chair and former head of the Council of Economic Advisors Janet Yellen being appointed Treasury Secretary. With Yellen’s background as a labor economist and an accommodative Fed, one might expect that over time labor wage levels may start to rise, something that could serve as an inflation driver as labor markets tighten. 

However, the price action in the bond markets do not reflect much in the way of inflation concerns, if any. The implied inflation rate calculated by comparing yields on Treasurys and on Treasury inflation-protected securities for the five years starting in five years’ time has risen only to 1.83% from 1.81% at the end of October, still below the 1.92% reached last month, the highest since August last year.

The best explanation for bond market yields remaining low lies in the expectation of monetary intervention by central banks as they move to keep long-term interest rates low so as to support economic recovery following the successful distribution of COVID vaccines. 

That said, while low interest rates serve to reduce the carrying cost of a gold position, the feared appearance of inflation that will drive gold prices higher lies well out into the post-COVID future.   

Question 4: 

David, it seems like the 2021 S&P 500 “Price Target Game” is in full swing and quite a few firms are swinging for the fences!!  JPMorgan sees the potential for a move to 4500 by the end of 2021; Goldman Sachs thinks 4300 will be seen by the end of the year; and BMO Capital Markets thinks 4200 is within reach.

What’s not to like about such upbeat forecasts? If they happen to be right, there will be a lot of happy index investors this time next year.  However, right now I think there are probably a lot of relieved index investors. The S&P 500, which was down -32.2% for the year at its low on March 23, is now up +12.6%!  

It has been an absolutely stunning turnaround in a year that has been absolutely stunning in myriad respects because of the coronavirus. However, 2020 isn’t done, though, and neither is the coronavirus.

In fact, it caught my attention last week when hedge fund manager Bill Ackman said what just about everyone is saying these days. He said he is optimistic about a recovery in 2021 but he also said “…the next couple of months unfortunately are going to be tragic and very difficult for the globe and for our country in particular.”

He went on to add that he is happy to be long with equity exposure, but that he thinks it is still prudent to have a decent-sized hedge should market volatility increase due to any number of uncertainties and after all his intention is to mitigate the risk of losing money for his investors.

It is easy to lose sight of that need in a raging bull market — and the market has been raging in November because so many people are looking for a bullish stampede next year.  

So, David with the S&P 500 pushing up against its all-time high at the same time the number of coronavirus cases in the U.S. and globally are also growing dramatically, is there the potential it could lead to a tragic year end for the stock market? 

Rick, it has long been said on Wall Street that no one gets fired for taking a profit. After the wild ride 2020 has brought and the gray hairs it has very likely created along the way, I would not be surprised at all that the stock market going into the end of the year will trade sideways. However, it is important for investors to consider that both the economic externals and the market internals remain constructive. 

As to economic externals, we remain in a supportive monetary policy environment and the chances are for some action on the fiscal policy front with the incoming administration. Relative to market internals, we have recently seen the Russell 2000 begin to outperform the S&P 500 as investors see the benefits from COVID vaccines working their way into the broader economy. While the S&P made a new all-time high on August 17th, it took the Russell until November 13th, and its prior all-time record was back in August 2018. 

Small-cap stocks rarely perform exactly in line with large caps over a 1-year period which means that, even with the Russell 2000 now matching the S&P 500 over the last year, there is the opportunity to make a profitable call on small-cap stocks in here as they tend to work better than large-cap stocks at the beginning of a business/economic cycle. This was the case in 1991, 1993, 2003, and 2009 – 2011. In each of those periods the Russell 2000 beat the S&P 500 over a 200-trading day holding period by at least +10 percentage points.

The takeaway here is that the Russell 2000 should outperform the S&P 500 over the next year. Ten points of outperformance is the usual early cycle difference in relative performance between the two, something offering sufficient potential upside to consider small-cap stocks now even at their recent new highs. 

Question 5

David, as we bring another episode of “A Brighter Future” to a close, I’d like to stay with the topic of the Fed and get your thoughts on the potential of Janet Yellen as our next Treasury Secretary?  Given that she is considered to be as “dovish” as Fed Chair Powell, could we be looking at more monetary and fiscal support for the economy than we are usually used to? 

Rick, as mentioned in passing earlier, presumptive Treasury Secretary nominee Janet Yellen offers a superb mix of unique theoretical insights into the labor market well-grounded by institutional practice both as Chairman of the Federal Reserve and Chairman of the Council of Economic Advisors. Should Yellen be confirmed and in our view it is very difficult to imagine the circumstances under which her nomination will not move forward, she will represent a trifecta in economic policy management. 

So, in response to your question, Rick, not only are we likely to receive more monetary and fiscal support, but more importantly the means and methods and focus of these efforts will be guided in an adroit manner that likely has not been seen in some time. That said, the confidence of investors worldwide has been and should be bolstered by the prospect of improved economic policy stewardship under the leadership of Janet Yellen as Treasury Secretary.