Corruption, eruption, and a time to heal
Hello, friends. I had just finished writing the first version of this blog on the morning of January 6 when all hell broke loose at the U.S. Capitol Building in Washington, DC.
My plan for this week was to provide an honest (and even optimistic) overview of where I see residential real estate, equities and global markets going in 2021. And I’ll still touch on that today, although it feels disconcerting to write about markets when the foundation of our democracy has been shaken to its core.
Although regular readers likely know my political leanings by now, I have tried to avoid using this blog as a forum for my views (which tend to be more complex than party labels allow, as is the case with many people). Instead, I’ve tried to present how I think various national and global situations impact the sectors that I discuss.
Looking ahead to 2021, I wanted to look at how I expect the broader, significant changes ahead—the incoming Biden administration, the Democrats securing Congress and the implementation of vaccine programs—might potentially impact markets.
Still, I can’t post this without first addressing this week’s absolutely abhorrent events. The message is clear and shameful. It is unfortunate that the Trump administration is ending on this note: there were some policies that were beneficial and he could have left a positive legacy for his administration.
For our nation to regain some semblance of respect for law, order and justice, which form the basis of our functioning democracy—those who broke laws and carried out violence should be punished to the full extent. Those who supported the actions, explicitly or otherwise, should be held fully accountable as well.
There is simply no alternative. Accountability is the only way forward. That, and taking collective and individual action to ensure that our country moves forward and begins to heal.
On to the markets
Despite all this, the markets keep rising, including yesterday’s as The Capitol was torn apart. This defies logic and morality, although apparently not history.
And so it goes and so, here’s my overview for 2021, with more insight and information to come in the weeks ahead:
For the markets, things look positive overall: The federal government will soon move forward with greater clarity in terms of the pandemic response and vaccinations, economic strategies and diplomatic relations. Having a highly experienced leadership team in place—as well as a Congress that will get things done—should foster resilience, stability and strength. Both nationally and globally.
Still, to bring the bottom of the “K” up and create more of a “V” recovery, we’ll need to add more fuel to the fire—more stimulus—which will cause a further exacerbation of market buoyancy and volatility.
Eventually, though, I believe that there’s a strong probability that nearly all asset classes will unwind and move back closer to averages.
Residential real estate:
I see several ongoing challenges within residential real estate. First, inventory remains lower than demand and second, interest rates are going to remain low for some time. These factors have fueled what I view as extreme increases in pricing in most markets, just about anywhere you look.
Despite this, in 2021, I don’t see any bubbles bursting and I don’t see prices dropping significantly. However, I do think we’ll see a leveling off of any further increases in most residential markets, especially in secondary and tertiary markets. Because I just don’t think these markets can sustain further price increases.
There are a couple of potential trends that bear watching:
If we can get the Covid vaccine rolled out successfully, then it’s likely that there will be migration back to major urban centers, particularly New York, which was hit hard by the first wave of the pandemic, and Los Angeles, which is currently experiencing a nightmare scenario.
I believe the “commercialization” of residential real estate will continue to dictate the types of homes that people buy and the money invested in renovations. Even after enough people are vaccinated, I think there are things that many people will continue to do from home, from working to working out. [That said, I can’t wait until I can work in an office again.]
On the other hand, I believe that most people are anxious to get back to restaurants, bars, sports arenas, stores and the like. The question is: will that part of life look the same as before the pandemic or are there more permanent changes in store?
Equities:
There continues to be a lot of noise in the markets and I see bubbles all over the place. Despite my concerns, I won’t make proclamations about when these could potentially deflate, simply because if anyone tells you that they know when bubbles will burst, you shouldn’t listen to them.
I admit, though, that many economists, analysts and investors disagree with me. So, here’s what I suggest: look at moving averages, which you can study for essentially all assets using benchmarks like price-to-earnings ratios (for stocks) and days on market and inventory levels (for real estate).
The following chart is an example from an Investopedia article explaining simple moving averages (and which is a good starting point.)
SOURCE: Investopedia
Current valuations for many asset classes are way above 100-day or 200-day benchmarks. However, because these have tended to normalize over time, I believe we’ll see these get closer to their medians.
Here’s why: moving averages reflect data compilations associated with human behaviors, particularly ‘fear of missing out,’ which ultimately causes problems. In investment bubbles, normal behaviors are out the window and history shows that we never really learn or change, we just shift the focus (CNBC has a great, brief video explaining how human behaviors fuel bubbles).
And I’ve said before that market decreases come more easily than increases -- crashes can happen in hours and days, whereas even the most bullish runs occur over weeks, months and years. For that reason, the velocity of increases in valuations are, to me, a significant warning sign because velocity is usually on the downside, not the upside.
As this excellent New York Times article points out, though, there’s significant impact on the markets from the federal stimulus that has already been infused since the start of the pandemic.
Looking ahead, it’s likely that a Democrat-controlled Congress means that there could very well be more federal funding poured into the economy.
In this case, it’s likely to further fuel bubble growth. Federal stimulus dollars tend to kick up the upside of the “K” shaped recovery, which is somewhat necessary while trying to bring the lower end of the “K” up and, as is the goal, result in more of a “V” shaped recovery, which would reflect recovery for more Americans across a greater spectrum of industries and economic circumstances.
A last thought for this week
As always, remember that this isn’t investment advice, these are just my opinions on where things stand now and where I think we’re headed, as well as the various factors that could tip markets one way or another.
That said, I think it’s a good exercise to look at moving averages and stick with one to understand asset valuations and potential bubbles better. Interesting industries to explore as forward-looking opportunities include healthcare infrastructure and related areas like logistics, detection, pharma, life sciences and healthcare-related tech/AI/intelligence.
Keep in mind, too, that ultimately, stability—not volatility—drives long-term growth and value. Negatives and positives typically occur together, so be sure you see and understand both sides as you move forward.
Stay strong, stay safe and set the groundwork now for a good year in 2021.
