February Commentary: One Year Later

One year ago, on February 19, 2020, the S&P 500 closed at a new record high. Little did people know, COVID was about to send shockwaves through the system. Roughly one month later the economy shut down causing the sharpest decline in U.S. economic history.

At the same time (weeks and months before the 30%+ dip), Allegiant's Economic Dashboard was warning of trouble ahead. The economy was showing signs of weakness and the Allegiant Investment Research Team was on the lookout for risks that could bring an end to the longest bull market in U.S. history. Warning of trouble ahead—at the same time the economy was expanding and markets were pushing higher—was not a popular opinion.

Even still, roughly two weeks after the S&P 500 hit a new all-time high we decided to reduce portfolio risk for our clients. Our academic approach to economic analysis correctly identified the rising risks in the system at the same time that we saw risks increasing with COVID-19. With only 100 COVID cases in the U.S. at the time, we believed there was a real risk that it would begin spreading at exponential rates. Unfortunately, that's exactly what happened.

One Year Later

Fast forward to today and the official infection count has hit nearly 30 million in the U.S. and over 110 million cases worldwide. COVID is omnipresent in our lives. The economy is cracked, but not broken. More importantly, it is on the mend. Inoculations have been slow to date, but will accelerate over the coming months, potentially spurring a resurgent economy.

Make no mistake, herd immunity will take time, but economic gains will surface before we reach herd immunity. Some of the hardest hit parts of the economy (hospitality, travel, entertainment, and leisure) could see the most significant gains as inoculations increase. In fact, I've heard first-hand from many clients and friends about long-awaited trips that are planned once they are vaccinated. In short, we anticipate strong demand for services that were avoided over the past year.

New All-Time Highs

The U.S. economy is smaller today than it was a year ago and yet equity markets are hitting new all-time highs. On the surface this does not seem logical. Could this spell trouble ahead? Possibly, but the environment today is much different than a year ago. Last year the economic cracks were under the surface; growth was slowing, and the economy was on the verge of a severe negative shock. Today, the issues are clearly out in the open, not under the surface, and the economy is now on the verge of a positive shock that could accelerate growth.

This is precisely what is being priced into markets, a future that looks better than today. As always, there are risks that the positive shock does not occur, but we also know the worst of the pandemic's economic impact is likely behind us. If we are to see a big economic disruption it will likely come from a different unknown risk, not COVID.

Speculative Tendencies

Having an improving economy and backdrop for further growth does not mean there are no reasons to worry. Market speculation is increasing, as evident in the recent movements in GameStop,Bitcoin, and SPACs, to name a few. (For a detailed analysis of the GameStop phenomenon please see Allegiant's Research Brief: GameStop Questions Answered). Excess financial liquidity can lead to frothy markets. So far, it is only appearing in small parts of the market and does not look to be a systemic problem. However, it is worth monitoring if excesses continue to grow.

Where We Go From Here

A year ago, our proprietary system for monitoring the economy led us to make defensive changes to your portfolio which created an opportunity to benefit from lower stock prices. Without this system it would have been easy to miss the increasing risks in the economy and markets. The U.S. economy was growing, corporate earnings were increasing, and markets were euphoric. But under the surface, the signs were turning negative.

We continue to use the same academic approach to our analysis and investment management. This limits the risk of making ill-advised emotional decisions and centers our thinking on the things that really matter to long-term investors. Unlike a year ago, that analysis shows signs are trending positive and we continue to believe they will improve as vaccinations increase throughout the year.

If you would like to see more articles about the economy, financial markets, and wealth management topics, click here to read Features from your Allegiant team on our website.

Here's hoping my February 2022 commentary will be referencing how far we have come in the wake of the pandemic. No matter what challenges and opportunities develop on the horizon, we will continue to serve as your advocate. We continue to independently examine real data, protect your assets through diversification, evaluate risk analysis and seize investment opportunities through comprehensive portfolio management. The Allegiant team is proud and privileged to serve as careful and expert stewards of your wealth.

Benjamin W. Jones, CFP®, AIF®
CERTIFIED FINANCIAL PLANNER™
President, Chief Investment Officer, Principal

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Sarasota, Florida 34236
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