In our latest edition of Obermeyer Wood News, we wrap up the most challenging year in recent history, looking forward to 2021 and what we hope will be a year of healing. We explore emerging investing trends for 2021 that include opportunities like pent-up consumer demand, corporate innovation, and liquidity from low interest rates and stimulus programs. We are also keeping an eye on trends that pose potential risks associated with the elevated U.S. debt load, increased scrutiny of big tech, and the effect lower interest rates have on valuations. By monitoring the risks and opportunities, we can better maintain a balanced view of the world economy and global markets.
Be sure to check out the entire newsletter below for a firm update, helpful tax season reminders, and advice on a wellness-related exercise. A .pdf version of the newsletter is also available by clicking here.
Investing Around Obstacles
As we wrap up the most challenging year in recent history, we look forward to 2021 and what we hope will be a year of healing. Our nation is charging ahead with a plan to vaccinate 80% of the population by June. Even if we fall short of that aggressive goal, our healthcare providers are clearing a path forward using better protocols around testing and treatments for Covid-19. We are on the precipice of controlling the virus and reopening the broader economy, and although it could take another year or more to get there fully, we are optimistic about what lies ahead.
Consumers are ready to experience the world again and spend their savings, setting up a potentially strong corporate earnings year. Companies are learning to optimize technology investments, furthering productivity gains. Liquidity from low interest rates and added stimulus is streaming into the system, supporting asset prices. We anticipate that many investors will be rewarded for staying invested and will enjoy the benefits these tailwinds have on the markets.
Yet, the economic recovery will likely be uneven, and the markets are not without risk. Short-term problems may derail progress, and concerning headlines will probably lead to pullbacks in stock prices. We aim to identify potential obstacles so we are not shocked when they arise, allowing us to navigate around them. In some cases, we may tweak our approach as new information emerges, and in others, we remain patient and stay the course.
So what is around the corner? In 2021, we will be monitoring several situations, including the elevated U.S. debt load, increased scrutiny of big tech, and the effect lower interest rates have on valuations. By monitoring the risks and opportunities, we can better maintain a balanced view of the world economy and global markets.
Can the U.S. Afford All of Its Debt?
The increased U.S. debt load has been a much discussed issue for investors concerned with how it will affect financial markets. From 2000 until 2019, the U.S. debt quadrupled; last year, it grew an additional 20% during the COVID-19 crisis.1 Debt may negatively impact countries in a few ways—it can unwittingly drive interest rates higher and hamper economic growth due to the heavy interest expense burden.
When debt levels exceed a country’s gross domestic product (GDP), creditors believe they are taking on outsized risk and may demand higher interest rates. At one point in 2020, U.S. debt was 135% of GDP. While it reached this level in part because of the sharp decline in the economy, it demonstrates a level that most investors are uncomfortable with the U.S. maintaining over the long run.
Today, interest payments make up about 8% of the U.S. budget. If rates were to increase, then the interest burden would grow as a percentage of total expenses, potentially squeezing out spending on entitlement programs.
So, can interest rates remain near zero? The U.S. is widely regarded as a safe haven for assets. The dollar is also the reserve currency, which central banks around the world hold and use for financial transactions. The combination of these factors means that demand for the dollar is high, driving down borrowing costs. If rates stay low, then the U.S. can comfortably pay its annual interest expense and easily refinance maturing debt, servicing the debt as the underlying economy recovers and grows.
How Will Continued Government Scrutiny Affect Big Tech?
On December 9, 2020, the FTC sued Facebook for anticompetitive behavior, alleging that the company purchased emerging threats Instagram and WhatsApp in 2012 and 2014, respectively, rather than competing with them. The complaint alleges that Facebook permitted other applications to connect to its platform so long as they refrained from developing competing functionalities. Google is facing similar complaints from the Department of Justice for “anticompetitive and exclusionary practices in the search and search advertising markets and to remedy the competitive harms.”2
It is important not to be on the wrong side of the government. Yet, as we learned from Microsoft’s antitrust case in the late 90s, the government typically shows restraint when it comes to breaking up companies. On November 5, 1999, Judge Thomas Jackson ruled Microsoft to be a monopoly and later determined that the company would need to be split in two – Windows and everything else. That decision was later overturned in the D.C. Circuit Court of Appeals, and Microsoft ultimately agreed to give its competitors easier access to integrate software with the Windows operating system.
When Facebook purchased Instagram in 2012, the picture-sharing company did not make a profit or have any revenue. It is tough to argue that Facebook eliminated competition in the same way that the acquisitive Standard Oil did when it eventually controlled 90% of the oil refining in the U.S. and attained near-absolute power in setting prices for one of the country’s most critical resources.3
Innovation is the byproduct of competition. As Bill Gates said, “Whether it’s Google or Apple or free software, we’ve got some fantastic competitors and it keeps us on our toes.” For our economy to thrive, regulators need to create space for up-and-coming technologies that will push our tech leadership to the next frontier. While breaking up big tech is an unlikely outcome, we welcome steps to increase competition, giving rise to potential new investments and strengthening existing ones.
How Do Investors Navigate Today's Low-Interest Rate Environment
It is possible to look at stocks and quickly dismiss them as being overvalued. The price-to-earnings ratio for the S&P 500 is at 22.1x and its dividend yield is at 1.6%, diverging from historical averages of 15.7x and 2%.4 Typically, this would indicate that the market is overpaying for a dollar of earnings. If the only thing that changed was the price-to-earnings ratio, this would be true; however, the investment landscape is different today than it was a decade or more ago.
Increased liquidity is causing the ground on which we value stocks to shift beneath us. As interest rates decline, liquidity flows into the system, and the cost of capital decreases. As companies can borrow more easily, they invest in new projects and capture a greater percentage of profit since less is going to pay creditors. Assuming the investments are profitable, the companies will grow earnings and become more valuable. Therefore, we anticipate an increase in a company’s valuation for every percentage decline in interest rates.
Additionally, the technology revolution that we are currently in has made companies more productive and scalable. Companies have automated both the back and front office, leading to greater revenue growth and profitability. Several companies have also successfully integrated themselves in their customers’ lives, giving them pricing power and the ability to increase wallet share. Investors should and will pay a premium for this. Not all companies are worthy of this esteemed status – yet for those that are, we believe the higher valuation is justified.
We will monitor these trends as they continue to evolve, and anticipate tackling other issues that will undoubtedly arise in the coming year. Risks are ever-present – but so are opportunities. Our approach is to invest around obstacles rather than use them as a reason to hide pennies under the mattress. Too often, investors hold back when expecting the market to decline; last year reminded us of the importance of staying invested even when things look bleak. We continue to believe that owning high-quality, reasonably priced assets is paramount to building wealth as the global economy heals and moves past 2020.
New Year Resolution: Finding Balance with the Wellness Wheel
January is traditionally a time for setting goals and resolving to do better in the coming year. As 2021 gets underway, what’s the best way to take stock of where you are – and where you’d like to be a year from now?
Enter the wellness wheel – a simple and practical way to measure your progress. The first wellness wheel, invented by Dr. Bill Hettler in 1976, encompassed six “dimensions of wellness” – physical, social, intellectual, spiritual, emotional and occupational. Each slice of the wheel was equally important to achieving holistic wellbeing and balance.
Hettler’s original wellness wheel has been modified over the decades to include up to 36 sections. To keep it simple, here’s a modest exercise in using a wellness wheel to start or keep your New Year’s resolutions rolling.
On a piece of paper, draw a circle and divide it into four equal sections: physical, occupational, financial, and social. Answer the following questions below for each dimension on a scale of 1 to 4: 1 = never | 2 = rarely | 3 = sometimes | 4 = usually.
1. I exercise at least three times per week.
2. I eat a healthy and balanced diet.
3. I get six to eight hours of sleep every night.
1. I continue to seek out new opportunities to expand my knowledge and skill set.
2. I strive to keep a healthy balance between work/school and the rest of my life.
3. I gain personal satisfaction from paid work and volunteer opportunities.
1. My spending and saving habits reflect my personal values.
2. I balance present-day spending with saving for the future and “a rainy day.”
3. I share my financial beliefs with the people I’m closest to.
1. I have close and trusting relationships with at least a few people.
2. I set healthy personal boundaries for myself, and recognize and honor other people’s personal boundaries.
3. I have a sense of belonging to a group or organization, and I don’t feel isolated.
Add up your scores for each dimension, and then take a good look at the numbers. Which areas did you score highest and lowest in? Where would you like to see your scores change for the better?
Pick the segments you would like to focus on in 2021. When setting your goals, try using the SMART method: Make them specific, measurable, attainable, realistic, and time-bounded.
For example, if you want to increase the time you spend exercising, set a goal to walk at a brisk pace for 30 minutes every weekday for the next 90 days. Strengthen your intellectual and social muscles by committing to reading one new book every month as part of a virtual book club.
As you set your own goals, keep in mind that the team at Obermeyer Wood is also always on hand to help you achieve them. Here are some recent examples: In 2020, we launched a series of monthly virtual workshops and other events – a series of web-based gatherings designed to educate and entertain our clients and friends on art, politics, wellness, finance, and other topics. Sign up for January’s session with cybersecurity expert John Sileo, then take time to watch recordings of some previous ones on the Insights section of our blog.
And when it comes to improving your financial wellbeing, our team members are always available for calls and virtual meetings to discuss overall financial or estate planning, generational wealth transfer, and preparing for tax season in conjunction with your other trusted professionals.
Here’s to a healthier, happier, and more prosperous you this New Year.
A Note From Wally
I have never been more proud of our team—which has a mission to deliver great service and long-term economic value to our clients. To this end, we are pleased to announce that Ali Phillips has been promoted to Executive Vice President of our firm. Ali works tirelessly and her leadership, largely by example, inspires us all. Please join me in appreciating her.
With nearly $2 billion of assets under management, we are aware of the great responsibility we have to the families, institutions, and individual clients whose lives we affect through our work and counsel. We are in a people business, which is perpetually motivating.
While 2020 has been a tough year with the pandemic and severe economic disruptions for some, we remain humble and thankful for our families, our clients, and for the wisdom that comes from hard work, change, and experience. In 2020, we aimed to add value to every relationship – from investment performance to estate-planning conversations to being your financial sounding board. We also aimed to add to our team by making new hires and expanding responsibilities. With our increased capacity, we look forward to being able to help even more. If you know of anyone who may benefit from the services we offer, please let them know that we would be happy to schedule a time to talk about their needs and goals.
We promise to remain focused on continued great stewardship going forward. Thank you for your continued trust.
Serving as your financial quarterback means that we keep an eye on your entire financial situation, not just your investments. In that capacity, we want to remind you that tax season is right around the corner. As you begin to gather tax-related information and critical documents, please keep in mind the following:
- Realized gains and losses and summaries of interest and dividend income are on Form(s) 1099. The custodian of your account(s) will send you these forms directly.
- These documents are usually issued in the first week or two of February. However, amended Form(s) 1099 can be issued at any time, meaning that you might want to delay filing your taxes until closer to the tax deadline.
- We can provide income estimates and capital gain and loss updates during the year to help you calculate quarterly estimates.
One of the core services that we offer to you is working directly with your other trusted advisors to make sure your financial house is in order. Please reach out to our team if you would like us to coordinate directly with your tax professional on the reports and documents mentioned above.