Market and Economics Observations Presentation

Market and Economic Observations

December 10, 2021

Covington recently presented their observations on the market and economy at our annual shooting event held at Pike Run Country Club. Please find our presentation commentary below.

Introduction:

Good evening on behalf of my colleagues at Covington and my wife Kim. Thank you for joining us here tonight. I trust you have enjoyed being here at Pike Run.

A few of us shot sporting clays earlier today and a few of us shot better than others. 1St place, 2nd place, and 3rd place trophies were awarded to the top shooters.

Alma Johnson has decided to put her feet up after working for 60 years. I can’t imagine why she would want to retire now. Eighteen of those years were with Covington. It was just Alma and I when we started Covington in 2003. My dream of owning my own firm would not have been possible without her. I will forever be grateful for her hard work and dedication for helping make Covington what it is today.  Alma’s retirement date is December 31, 2021. You may send your well wishes or contact her at the office before year end. Alma has been a mentor to everyone at Covington. She has set the bar high with her professionalism and work ethic and each person at Covington has learned a lot from her. Alma has been working closely and mentoring MaKenzie Maust for the past year and a half to cross train and offload her responsibilities as seamlessly as possible.

 

 

Market/Economic Observations:

The last two years have been the most unusual environment I have experienced in my professional career thanks to the pandemic. In recent months we’ve seen an election and change of a president as well as an increase in civil disobedience and lack of regard to the laws of our nation with not much improvement. Fortunately, we have had one improvement, given the pandemic - vaccines were developed, approved, and distributed in record time by our world class technology developments in messenger RNA as well as other traditional vaccines. Consequently, the Covid 19 virus has subsided but there was a reemergence spurred by the Delta variant and now we have the Omicron variant. The virus is dissipating as it mutates, and we will have an epidemiological end point. But for now, the world will simply have to learn to live with Covid, it is here to stay.

In the business world:

  • We still have an expanding economy - although decelerating. The economic resurgence that began in the third quarter 2020 with the greatest quarterly GDP gain in the history remains underway.
  • In the last two quarters U.S. business posted their widest profit margins since 1950. Earnings remain attractive.
  • Jobless claims are the lowest since the 1960s.

However, all the government stimulus and Fed accommodations has created “Bail Out Inflation.” This morning’s report on CPI came in at 6.8% year over year. Consequently, the Fed has announced a change in policy recently – tapering to be followed up with rate increases to contain inflation. Every bull market cycle has been killed by the Fed’s change in policy. Interestingly, though, is that the final 12 months on average of a bull market cycle produces one-fifth of the market gains. The Fed should go slow with these changes as technology will prove deflationary. Negative real yields will continue to favor risk assets.

So, we have a changing environment for investing as I indicated in my September investment observations letter an “Adjustment Period” is amongst us! And the story is all about T.I.N.A.. There is no alternative to stocks. With talk of Fed policy changes we have a bear bond market cycle beginning. Low rates compared to inflation make cash a negative return. The only real earnings in the market will be from stocks.

Increasingly U.S. business is virtual, digital and information oriented and no longer primarily devoted to agriculture or the physical manufacturing of products. This new pandemic focus will have a profound impact on which businesses will survive and which newcomers will supplant the incumbent as well as what our world will look like ten or twenty years from now. Much of investing going forward will require more technological expertise than it did in the past. As your Advisor we are keenly focused on these changes and where the capital flow is principally represented in our Gross Domestic Product now standing at $20T annually.

The government invested $9T in the economy to avert a global depression putting our overall government debt burden at $28T or 130% of our annual GDP. While the current federal annual operating deficit is 16% of GDP, some $3T. Generally, the deficit has been between 4% and 6% of GDP serving as the primer of the economic pump. The politicians and the Fed have treated a trillion dollars like its easy money. It makes Everett Dirksen’s (R-IL) comment about a billion dollars pale in comparison. Dirksen some years ago commented during a Senate budget hearing that “a billion here, a billion there, and pretty soon you’re talking real money.” Now billions have been reduced to pocket change, and it takes trillions to amount to real money! But do you really understand the scale of a trillion dollars?

Let me put this into perspective for you- a million dollars is spending $10 a second for 28 hours.  A billion dollars is spending $10 a second for 38 months. A trillion is spending $10 a second for more than 3,000 years! None of us will ever live long enough to spend a trillion dollars. But our government seems to have multiple lifetimes to spend a trillion here and a trillion there!

One new change is TAXES. So, I thought you might want to hear from our good friend Bob Eyer a CPA from Wessel & Co. to give us an update on the new tax law changes.

Afterwards, we will review some of the economic and market fundamentals to show where we have been and where we may be headed.

I hope you found all this information helpful. Thank you again for joining us here tonight at Pike Run.

 

 

Commentary Disclosures: Covington Investment Advisors, Inc. prepared this material for informational purposes only and is not an offer or solicitation to buy or sell. The information provided is for general guidance and is not a personal recommendation for any particular investor or client and does not take into account the financial, investment or other objectives or needs of a particular investor or client. Clients and investors should consider other factors in making their investment decision while taking into account the current market environment.

Covington Investment Advisors, Inc. uses reasonable efforts to obtain information from sources which it believes to be reliable. Any comments and opinions made in this correspondence are subject to change without notice. Past performance is no indication of future results.

 

 
 
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301 E. Main Street
Ligonier, PA 15658
Phone: 724-238-0151
Fax: 724-238-0148
Email: covington@covingtoninvestment.com

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