Please save Thursday, May 20, 2021 for our 12th Annual Investment Symposium, an “in person” event at the Westin in Downtown Chattanooga. We intend to mail invitations soon. While it is possible that certain social restrictions could remain in effect at that time, our ability to plan this gathering reflects unprecedented scientific developments and logistical efficiencies that have allowed for the vaccination of a large and growing percentage of our population. As we commented in last quarter’s letter, the global scientific effort to develop diagnostics, therapies, treatments, and vaccines highlights, perhaps, the greatest acceleration of research since the Great Space Race of the 1960s. Society will likely benefit for decades, in ways currently unimaginable, from applications developed from advances made during the past year in health care. This prospect has us both encouraged and excited for the future.
As of this writing, the US is administering nearly 3.0 million vaccine doses per day. At that pace, nearly fifty percent of our population could be fully vaccinated by the summer holidays. At the same time, the important “herd immunity” threshold remains elusive because of the emergence of new variants of the coronavirus. Consequently, we reiterate our view that the keys to market and economic performance in 2021 will be vaccine effectiveness and distribution.
Economic data will remain quite distorted for some time, particularly when compared with 2020 and historical trends. In general, however, we are constructive as global economies recover through capacity restoration and in response to pent-up demand. In many sectors, it is likely that demand could initially lead supply, resulting in temporary price surges. We expect producers will adjust to rising demand in a disciplined manner, allowing for prices to gradually normalize as sectors discover equilibrium.
Yields on Treasuries rose sharply during the First Quarter because of several factors. First, expectations for economic “re-opening” improved dramatically with the approval of vaccines. The bond market logically removed the deflationary impact of regional shut downs. Second, supply shortages in various sectors led to price surges. In response, investors began to boost expectations for future inflation. Finally, economic data have confirmed improvement, particularly in the US.
These trends were also reflected in equity market performance, which included an aggressive rotation out of defensive, “shut down” stocks, which performed handsomely in 2020, to cyclical, “re-opening” stocks, which performed poorly in 2020. For the past year, extremely low interest rates have supported lofty valuations in the stock market. As yields have risen, we expect further gains from equities will require earnings growth. We believe earnings estimates could prove cautious because of the dearth of demand visibility, providing market upside if results are better than expectations.
Despite growing market concerns over inflation, we do not expect the Federal Reserve will shift its policy stance in 2021. In public comments, Fed officials have committed to restore full employment and to tolerate inflation greater than their 2.0% target. In addition, massive fiscal stimulus should support economic growth as the world moves past the coronavirus. Our economic outlook for the balance of the year is positive as we anticipate growth in many sectors could exceed expectations.
Similar to the first few years following the Great Financial Crisis, consumers and corporations alike are hoarding cash, despite near zero interest rates. For the long term, we expect growth of precautionary savings will lead to slower, “normalized” economic growth and lower inflation. To the extent there are periods of volatility and uncertainty for the balance of 2021, we continue to recommend investors approach such situations opportunistically.