the well-th report
the missing link
hope for 2021
On the whole, Stephanie Link is bullish on 2021.
After a topsy-turvy year, this is welcome news from Hightower’s chief investment strategist and portfolio manager. We spoke with Stephanie in the early afternoon on January 6th — just after victory seemed imminent for Democrats keen on capturing the Senate, and just minutes before the attack on the Capitol that would come to define the subsequent weeks.
That day exemplified what the past year has proved time and again: that so much remains unpredictable. But unprecedented levels of fiscal stimulus, a “blue wave” in Washington, and the promise of recovery offer glimmers of hope for the year ahead.
Chief Investment Strategist and Portfolio Manager, Hightower
Unprecedented Fiscal Stimulus
In 2021, Congress passed huge amounts of fiscal and monetary policy stimulus, which has now begun to filter through the economy. “Last year, fiscal and monetary policy represented 44% of U.S. gross domestic product (GDP),” says Stephanie. “To put that in perspective: During our last financial crisis in 2008, fiscal and monetary policies represented 5% of GDP.” Though she hates to invoke that overused word — unprecedented — Stephanie believes the term accurately describes this situation.
“It really is an amazing number of policies that have been put in place to try to figure this out,” she says. “And if you fast-forward to 2021, we just got another $900M in fiscal. So now almost half of the U.S. GDP has been put into this massive accommodation cycle.”
It typically takes between 10 and 12 months for such policies to truly filter through the economy, Stephanie says. And now, as we approach the first anniversary of the COVID-19 pandemic, we’re beginning to see the positive effects of this stimulus: some relief for the hardest-hit sectors, a slight rise in inflation and a slow crawl toward normalcy.
This incremental progress, Stephanie said, is good news. “At the end of the day, what you really want is for the moves — in inflation, the dollar, volatility — to be measured,” she explains. “You do not want spikes. The market doesn’t like spikes. It’s okay if you see gradual increases in all these metrics. It’s okay if you see a gradual recovery in energy prices, in commodity prices. But it cannot be a spike.”
A “Blue Wave”
One question that weighed heavily on investors’ minds in late 2020 and early 2021 was whether there would be gridlock in Congress, or whether twin Democratic victories in Georgia’s Senate races would lead to a “blue wave.” We know now that Democrats control both chambers of congress.
“What that means is higher taxes,” says Stephanie, “but it also means even more stimulus, and even more infrastructure stimulus.”
And what does that mean? “What the markets will tell you pretty quickly is that as a result of this, a whole regime shift is happening. You’re starting to see value do better, small caps do better, international do better,” Stephanie says. “You’re starting to see interest rates firming. It’s a shift. You’re seeing this value from growth starting to really take hold.” According to Stephanie, this does not, however, spell the end of growth.
“I don’t think it’s over for growth,” she says. “You do have secular growing companies and total addressable markets for a variety of different companies: AI [artificial intelligence], cloud, cybersecurity, retail, e-commerce. These are all very powerful themes that are not going to go away. But they are crowded.”
On the flip side, Stephanie advocates investing in sectors that underperformed in 2020, such as industrials, materials and financials.
“It doesn’t take much for those sectors to do well,” she explains. “I think all the stimulus put in place last year will lead to better growth this year. And not only better growth, but better earnings.” Wall Street expects 21% growth this year, Stephanie says, but she believes growth could exceed 30%.
“The market is telling you that it’s time to maybe at least allocate more toward cyclicals and economically-sensitive stocks, and that just happens to be a lot of value sectors,” she says. “I’m not saying we want to be all in value or all in growth.” Although Stephanie finds industrials, financials and discretionary interesting, she still wants some exposure for secular growth technology companies. “Longer-term, they’re winners,” she says. “They may be out of favor for a little bit because they’re over-owned, but I don’t think you want to abandon them completely.”
What is “discretionary”? When referring to investing in “discretionary” we are talking about industries the population doesn’t need to spend in to survive. Think leisure and luxury industries like recreation, entertainment, sports and tourism.
Hope on the Horizon
While a “blue wave” presents the promise of additional stimulus, another more exciting event has sparked national hope: the rollout of the COVID-19 vaccines.
As of mid-February, the general public most likely will be able to receive the vaccine in late spring or early summer, according to Dr. Anthony Facui, director of the National Institute of Allergy and Infectious Disease, and an adviser to President Biden. “Then, you have all of this stimulus, and you have better economic data, and you have better earnings and all of the sudden, you have the vaccine, and the reopen stocks and sectors start to do better,” says Stephanie. “And the fiscal package provides a bridge between now and then. And that’s very, very important.”
So how should investors be preparing for the recovery period?
“As investors, we have to look forward,” says Stephanie. “The market is telling us that it’s going to start discounting six, eight, 12 months from now. And I believe you’re going to see a recovery, and you’re going to see a hotter recovery than people expected.”
Of course, hiccups can — and likely will — occur along the way: interest rates will begin to creep higher, taxes may increase under a Biden administration, and we are already experiencing a bumpy vaccine rollout.
“We’ll have to see how it plays out, but for now, I’m very bullish,” says Stephanie. “It was not easy buying low in March and April, but I’m not willing to sell here. I am willing to rotate a little bit: a little more cyclicality, a little less growth for the time being. So I think there are a million moving parts, and there’s always something to worry about.”
In Stephanie’s book, that’s not a bad thing. “The market always climbs a wall of worry,” she says. “And when it doesn’t climb a wall of worry, I worry.”
Here’s hoping the growth — and the worries — remain steady and manageable in the coming months.
For more information about Stephanie Link’s portfolio or to attend one of her monthly webinars, MarketLINK, please contact your financial advisor.