The First Quarter of the Roaring 20s?

Steve GibsonApril 21, 2021


The Financial Times recently ran an article comparing our current economy to the “Roaring 20s” of a century ago.

There are fascinating parallels in conditions playing out today. For one, the beginning of both the 1920s and the 2020s were faced with the closing days of a deadly pandemic. Similarly, both time periods have experienced economic expansion and growing monetary policies.

1920 saw the start of a fall from positive 20% inflation to a deflation of minus 15% and a deeper recession than today. But in 1921, “it was time for a damn fine party.” The pandemic recovery, rapid disruption from a farm led economy to an industrial boom, a land and home building speculation, innovations in autos and radio, booming global trade with massive immigration, and the end of prohibition created a euphoria. The nation was increasingly caught up in investment speculation and the images we associate with that period.

The expansion-focused policies lit a fire under markets which transformed the nation. It took a decade, but ultimately the boom only delayed the deep recession and ultimate depression that followed a decade later.

A Different Economic Picture Today

America mishandled the new industrial revolution in the 20s with protectionism and we are challenged today to assimilate radical technology disruption. The lesson for today is to reap the huge recovery and technology benefits while implementing multiple defensive investment strategies.

The first quarter of 2021 has the stock market already up about 6% with a focus on more value-oriented consumer stocks, energy, and financials. As we expected, small cap stocks have strongly improved returns. March of 2020 saw the historical decline in the markets and the economy. From here on, the year-over-year revenue and earnings comparisons will likely be strong for the next 12 months. That should drive stocks much higher.

While measures like price-to-earnings (PE) ratios make the market look overvalued, earnings will sharply rebound, and those measures will look less threatening. The success of vaccines, massive savings on the sidelines of more than $1.5 trillion, the pent-up demand, another $1.9 trillion stimulus, and relatively cheap debt leading to stock buybacks should all drive markets to much higher new records.

Like the 1920s, we expect speculation and volatility. But there is too much upside in this phase of the recovery to become overly defensive. We still are in a secular digital revolution and we remain overweight to growth which has begun to look more attractive from a pricing point of view. We may rebalance some of our gains in growth to value, but we do not try to time these swings and stay oriented to the longer term.

Deciphering the Bond Market

A major focus for HFA has been the bond market with real rates reaching below zero during 2020. We are seeing some inflation for the first time in a while. Just one quarter into this recovery year, rates jumped up from 0.9% to 1.7% on the ten-year benchmark. That led to some NAV declines in bond funds while yields remain at 2% or less for many fixed income investments.

We expect the next decade or more could prove challenging for bonds and we have introduced and communicated multiple new ways to produce steady income with strong protection against stock market declines in our new strategic/hedged category. The few investors who prospered at the end of the 1920s were those who maintained significant defensive investments.

We do not think a full depression will occur today because of radically different banking and an activist Federal Reserve. However, we are spending as much time on making sure we have carefully planned defensive tools for major corrections as we are trying to attain strong equity results.

Our use of hedged equity, solid international diversification, interval funds, diversification by cap size and style, and remaining fixed income holdings such as bond ladders all are targeted to make us a steady income performer and more able to reduce any impact of a sharp market decline.

The End of an Era or a New Beginning?

There is debate about whether we are in the first year of a recovery or year 11 of a bull market. We clearly are early in a stunning digital and biotech disruption. Regardless, HFA has been part of guiding clients to a substantial building of wealth which helped make us among the top growing firms in the nation.

We greatly appreciate the privilege of serving our loyal clients and are committed to successfully navigating 2021 and beyond. It is our hope that 2021 will see us again able to meet in person.