Last spring, we wrote about reasons for hope in a sick economy. We talked about the medical advances that were on the horizon, the swift action our policymakers were taking by injecting $2 trillion into the economy, and how we entered the crisis in a position of strength, with all the tools necessary for a quick recovery. A year later, we have multiple vaccines, the economy is swimming in liquidity, and we are beginning to see one of the strongest recoveries in history. While we did not envision all the ways that the pandemic would upend our lives and change our nation, we are encouraged by how the global situation is improving.
Looking ahead, we are moving into a period of a different kind of uncertainty. On the one hand, there is much good news to celebrate. As of April 1, more than 15% of the U.S. population is fully vaccinated, and providers are administering an average of 2.83 million doses per day. If the pace continues, most American adults could be vaccinated by the summer. Museums, movie theatres, and theme parks are welcoming back guests. Summer trips to see distant family members are getting booked. Schools have firm plans to reopen in the fall, providing much-needed relief for working parents. But even in the face of these positive events, concerns about a fourth surge remind us that we need to remain vigilant, and that Covid-19 is still with us.
The pandemic’s economic toll was not as costly as many predicted, and the consumer is on solid footing as the U.S. reopens. While it felt dire at times and many Americans suffered, U.S. gross domestic product (GDP) contracted 2.3% in 2020, a welcome outcome given the depth and breadth of stay-at-home orders. Consumer spending, the main contributor to GDP, “finished 2020 down only 2.6% as federal stimulus supported incomes and digital commerce proved efficient, affordable and surprisingly adaptable during shutdown.” Even with strong spending, the pandemic forced many consumers to save, increasing the household savings rate to 20.5% of income, nearly three times the pre-pandemic level. A higher saving rate and pent-up demand position the consumer for above-average spending in the months ahead.
Even corporations saw some surprising results as they juggled remote workforces. According to a Harvard Business Review study, “We estimate that the best companies — those that were already effective in managing the time, talent, and energy of their teams — have grown 5% to 8% more productive over the last 12 months. Additional work time, access to new star talent and continued engagement have bolstered productivity at these companies.” While some employers saw more hours logged, we know that not all companies adapted so quickly. The same study says that most companies experienced a net reduction in productivity of 3% to 6%. Remote work negatively affects innovation as collaboration is more challenging and employees lose engagement.
The pattern that we see is that things are getting more uneven. High-performing companies are doing better, and the wealthiest Americans are getting richer. But nearly 10 million Americans, or about 6% of the workforce, are unemployed. Most of the unemployment affects minorities and lower-wage earners, who were disproportionately impacted by the shutdowns. Roughly 2.5 million women left the workforce due to the strain the pandemic had on families. A smaller workforce means lower national productivity. Because the situation is still precarious for a significant number of Americans, many policymakers are pushing for additional action.
President Biden’s American Jobs plan is his $2.3 trillion answer to create jobs and address the uneven recovery. The plan intends to upgrade our nation’s roadways, bridges, rails, and airports; overhaul electric grids and water systems; expand broadband internet access; and invest in public schools and childcare centers. Funds are earmarked for job training and for research and development to solve problems such as climate change. The White House may include other provisions to address prescription drug pricing and has made it clear that developing this bill will be a fluid process. The stated goal is to “create millions of good jobs, rebuild our country’s infrastructure, and position the United States to out-compete China.”
Creating jobs and out-competing China are important, yet the magnitude of spending leaves some experts wondering: what are the consequences of adding $2.3 trillion to the system on top of a year where there has already been unprecedented stimulus? For example, former Treasury Secretary Larry Summers is sounding the alarm and believes that Biden’s plan will more than fill the output gap, or the difference between what is possible for the economy to produce and what it actually produces. If Summers’ prediction is correct, then we may be on a path to add more liquidity than our system is able to absorb. Adding to the concern is that consumers have pocketed $1.6 trillion of excess savings from the last year and want to spend it now. Given the combination of stimulus and spending, the economy could overheat and potentially allow for inflation.
But why is inflation so concerning, and how do investors navigate around it? Inflation erodes purchasing power. As prices rise, consumers buy more now to avoid paying a higher price later. If this pattern continues, then demand increases, and the upward price spiral continues. The relationship between demand and rising prices can be unpredictable and destabilizing.
In thinking about how inflation affects the stock market, a similar phenomenon occurs. Investors desire to maintain their purchasing power. Traditional value, or more mature, companies produce strong cash flows, while growth companies have little or no cash flow today but are expected to yield it in the distant future. In a high inflation environment, each dollar of earnings today becomes worth more than it would be worth 10 or 20 years from now. Investing in a value stock now results in getting cash back sooner than you would if you invested in a growth stock, in theory allowing you to preserve your purchasing power. For this reason, value stocks tend to outperform growth stocks during periods of inflation.
And yet, as Warren Buffett aptly pointed out in 1977, “It is no longer a secret that stocks, like bonds, do poorly in an inflationary environment.” This wisdom from over four decades ago still holds true: inflation is a risk to the market and our clients’ hard-earned savings. It may not matter whether you are invested in a value or growth stock, since the entire market suffers.
So how do investors move forward if stocks are likely to perform poorly? Rather than buy the market, Buffett suggests owning companies that have “1) an ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume, and (2) an ability to accommodate large dollar volume increases in business (often produced more by inflation than by real growth) with only minor additional investment of capital.”
Our investment process incorporates this guidance. We look for companies that have deep moats, or competitive advantages, and sell a unique product or service to a large market, thereby giving them pricing power. We aim to hold companies that can scale quickly without a heavy investment of capital. In doing so, we believe that we can help our clients continue to successfully grow their net worth for decades to come.
Lastly, it is not a forgone conclusion that we will have significant inflation. Biden aims to make his plan “self-funded,” meaning that there will be a transfer of wealth from one group (e.g., large corporations and high-income earners) to another through taxation. In theory, plans that pay for themselves are not inflationary, although they can create other issues. Investors should also remember that the U.S. has run large deficits and utilized accommodative monetary policy in the past without any significant inflation.
Whether or not inflation incurs, we are optimistic about the economy, the pace of vaccinations, and the path that our country is on. We will continue to monitor the risks and work diligently to position portfolios to be successful across a range of environments in order to thoughtfully grow our clients’ net worth over time.
RECOMMENDED READING: Think Again, by Adam Grant
Did you know that many of us subconsciously assume the role of a preacher, prosecutor, or politician (the “three P’s”) over the course of a single day? The next time you find yourself contemplating a political issue, talking to a friend about the big game last weekend, or meeting with colleagues about an upcoming project, take a moment afterward to reflect on the way you were thinking and talking. Did you preach the validity of your viewpoint? Did you prosecute other people’s ideas with the intent of proving yourself right and the winner in a zero-sum game? Or maybe you played the politician’s role and attempted to marshal the support of your like-minded allies to prove that your idea was better?
Author Adam Grant says that the vast majority of us can answer “yes” to at least one of these questions when examining our daily thoughts and interactions with others. According to Grant, this demonstrates the type of rigid thinking that prevents growth and contributes to conflict and stagnation, either at the individual or organizational level. Instead of playing the role of one or more of the three P’s, we should think like a scientist and embrace rethinking and retesting our established ideas.
In his new book, Think Again, Grant uses fascinating case studies and compelling anecdotes to demonstrate that questioning what we think we know is imperative to evolving in an ever-changing world. At its core, his message is that we must challenge our tendency to cling to our ideas and hold them as absolute truths.
In one of the most memorable parts of the book, he dives into the story of mobile device company Blackberry. In light of market research and cultural trends telling Blackberry’s CEO otherwise, the leader of the company refused to let go of his belief that email functionality should be at the core of a mobile device. As a result, the company was quickly left behind as Apple and other smartphone developers produced app-based devices that gained dominance. Had the CEO thought more like a scientist and allowed his views to fluidly adapt as the consumer base changed its appetite, then maybe Blackberry would have thrived.
Gleaned through years of being a leading organization psychologist, best-selling author, and tenured professor at the Wharton School of the University of Pennsylvania, Grant’s work is fascinating and informative. Please let us know if you are interested in reading Think Again, and we will send you a copy.
New Team Member: Brooke Gais
We are excited to welcome Brooke Gais as our newest team member. In January, she joined the firm as Associate, Client Services, and her primary responsibilities include supporting our relationship managers in onboarding new clients and addressing their ongoing financial needs. Brooke came to Obermeyer Wood from Perella Weinberg Partners, where she managed the investment proposal process for prospective endowment, foundation, and family office clients seeking investment management services. Her previous experience includes client services and portfolio activity at Twin Brook Capital Partners in Chicago and client portfolio and new account management at Morgan Stanley in the firm's high net worth wealth division. Welcome, Brooke!
Virtual Events Recap
Our monthly virtual event series has been one of the silver linings of this socially distanced year. We enjoy being able to gather with clients and friends each month to listen to engaging speakers who inform and educate on a wide range of topics, including finance, markets, arts, culture, current events, and wellness.
The first quarter of 2021 featured three of our favorite events since we began the series in May 2020. In January, we welcomed cybersecurity expert John Sileo for his education session “7 Steps to Keep Hackers Out of Your Privacy, Wealth & Work,” which focused on detecting pernicious “headline” scams, locking down a smartphone, securing a home office, and simple tools to protect one's online presence.
The following month we were honored to host Mary Beth Franklin, CFP, for her workshop “COVID-19’s Impact on Social Security Claiming Decisions,” which was followed by a Q&A session. Topics covered included general claiming strategies, Colorado-specific rules, and planning best practices for spouses and singles.
Finally, the month of March featured Jeffrey Kleintop, Chief Global Investment Strategist at Charles Schwab & Co. Jeffrey gave a fascinating overview of international issues and events that hold implications for U.S. investors, including global vaccine distribution, trade relations, and the status of the race towards economic reopening.
If you are not receiving the invites for our monthly events, please call our office directly or email email@example.com. In most cases, each event recording can be found on our website’s “News & Blog” section.
Obermeyer Wood Recognized by Forbes, Barron’s, and Denver Business Journal
We are honored to report that the Obermeyer Wood team appeared in four prestigious rankings and awards lists in the first three months of 2021.
In February, Denver Business Journal recognized our firm in its “2021 Investment Managers and Financial Planners based in Colorado” ranking for the sixth consecutive year. Later in the month, Forbes and SHOOK Research released their annual rankings for Best-In-State Wealth Advisors. Representing our firm on that list were Wally Obermeyer and Ali Phillips.
In March, Phillips and Obermeyer represented our firm on Barron's Top 1200 Financial Advisors ranking. Obermeyer has been a mainstay on this recognition list for over a decade, and this was Phillips’ first time receiving this honor. Later in the month, Phillips and Dana Nightingale were named to the Forbes and SHOOK Research list of Top Women Wealth Advisors, marking the fifth year in a row that our firm has been recognized in that ranking. In the three Forbes and Barron's lists, our firm was the highest-ranked independent advisory in the state and the only firm in Colorado with two advisors on each list.
We remain humbled by the recognition and awards that we receive and believe that each one reflects our entire team’s dedication to and focus on serving our clients, whose partnership makes honors like this possible. For more details on these awards and links to the rankings, please visit the News section of our website.
A .pdf version of the newsletter is also available by clicking here.