Tag: federal debt

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Schwab 2021 US Market Outlook

This month, I will refer investors to the Schwab 2021 US Market Outlook by Charlos Gary as I believe it offers a good summary of the economy and financial markets.  Some key takeaways:

  • Gross domestic product (GDP) has not fully recovered from its contraction since the first calendar quarter.
  • Consensus economic forecasts for GDP growth in 2021 are in the 3.1-3.4% range.
  • Permanent job losses have increased steadily during 2020.
  • Unemployment has declined from a peak of 14% in the spring to under 7% now.
  • The most frequent questions on Schwab webcasts are related to the federal budget deficit, debt, and inflation.
  • The Big 5 stocks (Alphabet, Amazon, Apple, Facebook, and Microsoft) account for 25% of the capitalization of the S&P 500 and their year-to-date performance exceeds the other 495 stocks of the S&P 500 by over 40%.
  • The forward price/earnings ratio (based on a forecast for the next 12 months) of the S&P 500 is currently at 26, matching the peak level of the “tech bubble” of 2000.  However, the P/E of the Big 5 stocks now is nearly half the level of the Big 5 stocks of 2000.
  • Sentiment indicators indicate extreme optimism, which is bearish for the market.  Net foreign purchases of US stocks are at record levels.
  • Their concluding line: “Investors should remain disciplined, diversified and opportunistic with regard to rebalancing.”  I agree.

If you would like to read the full article, click on the following link:  2021 U.S. Market Outlook: Better Days? | Schwab Funds

The Recent Merger

As most of you know by now, Charles Schwab recently completed their acquisition of TD Ameritrade, which I have used as custodian (including the predecessor organizations) for client accounts for more than twenty years.  For now, TD Ameritrade operations will continue as though it is a separate entity, but eventually their operations will be merged.  Charles Schwab has an excellent reputation and I expect a good working relationship with them in the future.

If you have any questions, please contact me.

Sincerely,
Robert G. Kahl
CFA, CPA, MBA

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Political Dysfunction Reaches New Heights

Regardless of the election outcome, the prognosis for political cooperation is poor.  In the past, many of us recall political debates that that had a sense of decorum.  It also seemed as though the distinctions between political parties were more subtle.

This year, the first Presidential debate reminded us of a high school cafeteria food fight.  It appears that the two major political parties are incapable of agreeing on much of anything.  As a result, much of the activity in Washington, DC seems counterproductive and theatrical in nature.

Jeff Gundlach, CEO of Doubleline Capital, has a reputation for being outspoken and having a better batting average than many when making predictions.  At the start of 2016, he predicted that Donald J. Trump would become the next President when he had not yet emerged as the winner from the Republican primary fracas.  Gundlach has never endorsed Trump and in fact has criticized him for relying too much on hyperbole such as “the best economy ever.” Gundlach took issue with the description because economic growth has relied to a large degree on government deficit spending.

On a Schwab webcast last week, Gundlach once again predicted that President Trump would be re-elected.  Gundlach said, “The polls right now say he isn’t going to win, but they said that four years ago.”  He referred to a chart from Predictit that showed the betting odds of a Trump win at about 42% now versus 13% in 2016.  In contrast to the flip in the betting odds from four years ago, Gundlach qualified his prediction by saying “my conviction is way lower than it was four years ago.”

Gundlach attributes much of Trump’s advantage to avoidance of uncertainty.  “You might dislike Trump or some of his policies, but risk is not what you’re getting with him, particularly compared to turning the presidency over to another party, and particularly when that party’s candidate isn’t saying what some of his policy positions are.”

Living up to his reputation for being outspoken (especially for a bond manager), Gundlach predicted that by 2027, economic inequality, strained by fiscal and monetary policy, would come to the point of some sort of revolution.  As for the 2024 election, he had this to say, “Well, if you think 2020 is weird, just wait for 2024.  You ain’t seen nothing yet.”

Another round of corona virus aid and economic stimulus was postponed until after the election.  A wide gap exists between the two parties regarding the total size of the aid/stimulus package, how much aid should be given to state and local governments, enhanced unemployment benefits, special liability protection for businesses, and other issues.

The Congressional Budget Office projects the budget deficit to decline from a record level of 16.0% of GDP ($3.3 trillion) in fiscal year 2020 to 8.6% of GDP for the fiscal year ending September 30, 2021.  Of course, the projection includes a variety of assumptions that are subject to change.  Regardless of the election outcome, we can expect the continuation of large budget deficits and dysfunction in the political arena.

If you have any questions, please contact me.

Sincerely,
Robert G. Kahl
CFA, CPA, MBA