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Core Comments Quarterly Newsletter

January 11, 2021 Well as one crazy year fades it appears to have paved the way for another crazy year based on last week’s events in the Capitol. It is impossible to know if this year will contain more surprises or just get back to being uneventful. Wouldn’t that be nice?

In the fourth quarter the markets continued their recovery despite an economy that is now regularly compared to the Great Depression. Two events are most responsible for the market gains, the emergence of several vaccines and the shift of political power to the Democratic Party. The political shift holds out an expectation of more Fiscal stimulus and probably higher taxes for corporations and high-income individuals. It also means a significant increase in Government Debt as the new taxes will not be enough to pay for everything that they want to spend. The only way out of the debt is economic growth or inflation. We will probably see some of both. The vaccines hold the key for restarting economic growth globally. That cannot come fast enough yet we are now seeing how hard it is to distribute the vaccine here let alone the difficulties to be faced in lesser developed countries. Hopefully, this moves faster as we gain experience and as the infection rate declines allowing more medical personnel to shift their time from caring for the infected to giving the vaccine.

During the fourth quarter the S&P 500 set some new records and returned 18.4% for the year. Small stocks did a little better up 20%. Developed International rose 8.3% and Emerging Markets gained 18.3% which made the world’s stock markets the place to be despite having suffered one of the fastest and deepest declines in history. The bond market measured by the Aggregate index rose 7.5% on about a 1% decline in interest rates. These were very generous returns given the circumstances and only some of that traces to the large technology companies, the FAAANM who have recently had Tesla join their ranks making this group of seven approximately 28% of the S&P 500. Large US stocks remain seriously overvalued and Emerging Market stocks are the cheapest by valuation, yet this tells us nothing about the future direction of the market.

So where do I think things are going? I expect that global growth will resume in the second half of the year. I think short term interest rates will remain at essentially zero while long term rates may climb a little. I suspect more Government spending to follow the $900 billion recently approved. I expect higher taxes later this year although nothing too extreme as the economy needs to heal and a large tax hike would be counterproductive. I suspect that Biden will follow a moderate approach to government. We’ll see!

The potential flies in the ointment that appear obvious are that the virus reemerges possibly in some other form for which the vaccine is ineffective which kills off the resumption of economic growth. The other problem is that whenever valuations are extremely high it is possible for markets to correct extremely for essentially no reason. I’m rooting for better times in the second half.

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