Market Q&A with Blaine:
Stimulus, Fixed Income and Housing

Q&A with Blaine Rollins, CFA - 2020 Market OutlookWe recently asked readers of our popular market commentary, the Weekly Research Briefing, to submit market-related questions for author Blaine Rollins, CFA. We had several interesting questions come in, so we thought we would use this week’s blog to share some of Blaine’s responses.

Question: The S&P 500 Index hit an all-time high last week. It seems again like a disconnect between the market and reality. Do you think the market will reflect it at some point?

Blaine: There is not a disconnect given the amount of stimulus aid and financial backing that the Federal Reserve and Treasury have pumped into the system, either through direct payments to individuals, PPP aid to small businesses, large aid packages to the airline companies, or lower borrowing rates in the market due to bond asset purchases. There is a tremendous amount of money floating around, with not a lot of places to spend it as individuals are stuck working at home and companies have put many spending plans on hold. So, the individual and corporate checking accounts are bulging which is causing investment assets to be bid up as our savings rise.

J.P. Morgan calculates that over $9 Trillion in stimulus has been made available for the U.S. economy alone (see chart below). No matter how bad the Q2 economy may have been, this very large amount of Government aid is meant to pull the economy up off the ground so that it can start walking forward again. And it will, just as other countries have shown that they can move past the virus and get back to their pre-COVID levels, like China and Germany have done recently. The forward-looking markets are telling you that we will recover. Once the economy has recovered and inflation is moving higher, the very big dilemma will be how do we remove the trillions of dollars of stimulus from the U.S. economy. If the Fed and the Treasury do nothing, then the U.S. dollar could suffer and inflation could rise and interest rates could follow. If this happens, future S&P 500 prices will not be hitting all-time highs any longer.

JP Morgan

(JP Morgan)

Question: With fixed income future expectations looking bleak. Do you think we will see a new incarnation of the 60/40?

Blaine: The 40% typically allocated to bonds in a 60/40 portfolio now looks like it is destined to be an asset class with all risk with no return. This 40% slice will need to find new areas in which to invest if inflation rises with a falling dollar and interest rates rise. Income-seeking investors might look to much shorter duration bonds only to take credit risk with less interest rate risk. Some might look toward dividend-paying stocks. Some will look at alternative investment strategies that can provide more stable returns than a pure equity or bond portfolio. And some will look at commodity exposures to protect against a rise in inflation. The future mix will be much different from the historic 60/40 blend.

Question: Is the COVID vaccine already priced into the market?

Blaine: The markets are currently betting on a few vaccines being approved before year end with (limited availability) and more widely available vaccine inventory in the first and second quarters of 2021. While there should be many different vaccines available in 2021, we will be watching to see their effectiveness. But even if the vaccines are only 50% effective at helping the population to create antibodies, this could go a very long way to ending the current strains of COVID-19. Especially with maybe 5-10% of the population already having developed herd immunity by contracting it. And by 2021, testing and tracing should be much more developed so that we can better control any local outbreaks that occur.

Question: How could the delay in stimulus 2.0 affect the economy and the millions of Americans in need of this money for rent/mortgages?

Blaine: A delay in the next round of stimulus would cause the 20+ million Americans who lost their jobs due to COVID to be stressed to pay their future rent or mortgage payments. This ripple would directly impact the owners of the apartment or housing assets including the many residential and commercial mortgage pools that own the assets. This would of course flow through right to investors. Evicting tens of millions of renters or homeowners would not be a good solution since there would be few waiting to move into those residences. It would only stress individual families further and make the homelessness problem even worse.

Question: Looks like Palantir is moving its headquarters from Silicon Valley to Denver. Could this be the first of more moves to come from tech companies to the Denver area or other areas?

Blaine: While Palantir has decided to move its headquarters to Denver which could be good for our State’s corporate sales tax base in the future, we do not know how many of their 2,500 employees will follow the corporate address. Palantir is an information services firm that helps companies mine their data for opportunities that they might have overlooked. Everything that Palantir does is at the customer company level with most of that data being held up in a cloud somewhere. So Palantir could very easily have an address, a front door and a receptionist but maybe no other employees in our city. With technology and employees being able to work from anywhere these days, I would only guess that the employees moving to Denver would be the ones that like to ski or enjoy 300+ days of sunshine. But then again, if they like to ski, why not just live in Crested Butte or Beaver Creek and work remotely?

Ask Blaine Your Questions: Send your market questions into blainerollins@361capital.com and it may be featured in a future blog.

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