Despite a 3+% drop in the last two trading days of the month, a fully diversified equity portfolio posted a very solid 2.9% increase in February. The bull market is well underway. The issues are few. The opportunity is ample. The road map is laid out for all to see – at least for those willing to do so - and all we need to do is keep our eyes on the road.

The economic story of January 2021 was one of hesitancy with the virus and its growing variants still seeming to hold the upper hand versus the then-‘wobbly’ (seems like as good a descriptor as any) vaccination effort. But a month later it seems quite clear that the onslaught of vaccines and vaccinations have decidedly shifted the COVID-19 battlefield for the better. Never mind the official data which is reporting a strong upward bias for both consumers and manufacturers. It’s obvious in our daily lives. Assuming it’s open, try getting into your local watering hole at 7PM on a Friday or Saturday – good luck! There’s no waiting for treadmills at the gym – and of course the showers are closed – but you’re hardly the only one in sight any longer. We’ll shed no tears for still being able to relatively sail along on the suburban highways during rush hour – but now you have to slow down here and there. With yet another vaccine- the one-shot J&J – announced today, the re-opening of America is well underway.

Impact of the CARES Act 2

Of course, it’s not just the vaccination progress that’s reinvigorating economic activity – it’s also the now-very palpable impact from the $900 billion CARES Act 2 that is now putting real dollars on the street, in the hands of so many folks who not only need them but will also spend them. Plus, there’s another monster COVID-19-relief stimulus package ($1.9 trillion!!) edging closer and closer to reality. Assuming that passes, the total relief effort since March 2020, will exceed $6 trillion. With due credit to the late Illinois Senator Everett Dirksen*, that’s real money.

Renewed economic strength

The markets have responded, across the four major silos. The renewing economic strength gave the previously weakened U.S. dollar a boost on the foreign currency exchanges. Longer-dated interest rates posted as large a percentage increase as any I can recall in my nearly 40 years on Wall Street. As noted above, stocks took off like a bottle-rocket in the first three weeks before those rising rates caught traders’ attention. More below. Within the commodity sphere, even with stock-pacing 3-4% declines in the last two days, bellwethers copper and oil rose 15% and 16% respectively. Perhaps because it is still regarded as a hedge against aggregate (economic, social and political) risk, gold fell 6.5% in February, its worst monthly return since June 2013.

Future inflation concerns

The immediately aforementioned impact of rising rates on stocks had everything to do with concerns over future inflation. Inflation, for those who might remember the 1970s, is indeed a very pernicious economic phenomenon because, once-truly embedded, it makes real economic progress very hard to maintain. Nominal growth takes off – which for most of us is just fine of course – but once you paid all those ever-higher bills, you’re no better off than when you started. For those of econometrically inclined, the ‘discount rate’ of future growth expands dramatically, considerably reducing the expected value of future earnings and dividend streams.

That’s the worry. But is it real? Someday, yes. But not today and not tomorrow…and likely not until at least 2023-24. Inflation sets in when too much money chases too few goods. Yes, $6 (new) trillion is lot of money.

Chases and goods

But let’s add some additional context, around the words ‘chases’ and ‘goods’. Chases refers to what economists call the ‘velocity’ of money, i.e. how much additional and sustainable activity actually results from an additional dollar of stimulus. Because by necessity those COVID-19 relief packages defy any rational targeting process and are therefore very blunt instruments, it is estimated that roughly only 20 cents on the dollar are being spent (and even much of that with a palpable lag), with the remainder saved or invested or used to pay down debt. Again as a rough estimate, the aggregate economy fell behind well over $1 trillion in 2020 versus its already sub-par 2% real growth rate pre-COVID-19. The ‘only’ $4 trillion already approved has maybe covered only half that gap.

The labor factor

Secondly, by far the largest economic factor encompassed within ‘goods’ is labor. If one correctly includes those under/completely under-utilized ‘gig economy’ workers, the unemployment rate is still close to 10%, equal to the highest level during the Great Financial Crisis of 2008-09. There are massive numbers of Millennials and soon, Gen Z-ers surging into the work force day by day by day. Since it is my contention that inflation cannot become a problem until it embeds itself in the wage base, this massive supply of labor should mitigate cost-push inflationary pressures for perhaps years.

Impact of tax cuts

I will add one prospective context. The macro-economic policies of the immediate past – tax cuts - were purely transactional and, yes, indulgent. After creating a ‘sugar-high’ in 2018 and into 2019 of economic activity that really only benefitted the upper 10% (think casinos and high-end hotels), the pre-COVID-19 economy by early 2020 had levelled out considerably, to that 2%-ish noted above. Manufacturing became an even lower percentage of our economy in 2019 that it was in 2016.

Massive infrastructure package coming our way?

I have waxed lyrical before about the potential for a massive infrastructure package, which I’m sure will hit our economic consciousness soon. Based on some preliminary work by Wall Street’s government policy analyst community, its spending commitments will be huge by historic standards but pale next to COVID-19, i.e. maybe $1 trillion spread over a number of years. But since these will create goods-producing industries not just embraced but augmented by the private sector, with sustainable and productive and well-paying jobs, the economic effect may well be a multiple, rather than a fraction, of each dollar. After the near-term massive return to economic growth in 2021 based purely on COVID-19-relief of perhaps 5-6%, the resulting long-term real growth rate could re-accelerate to the 3% that was in place for decades and decades, and that will benefit all segments of society.

Early days of the bull market

My opinion – we are still early days in the bull market of the 2020s. The 75% surge off the 3/23/2020 lows as of mid-February marked the sharpest rise since 1932. This dwarfs the 11-month increases in the massive bulls of the ‘80s (64%) and ‘90s (31%) and 2010’s (58%). Trading internals of breadth and volume are blowing away past comparatives. This is good, not bad. By far the best leading indicator of future market activity is the market itself. Sure, and as last week proves, stock markets on a big ride can be susceptible to quick reversals that bring every Skeptic back out of the woodwork. Good for them – they keep us bulls on our toes. But they’ll be Converts some time too – likely at much, much higher stock prices.

We look forward to your questions and comments.

*to him is attributed the famous quote – “A billion here and a billion there, and pretty soon you’re talking about real money.’