2021 Q2 Outlook

April 01, 2021

Dear Clients & Friends,

We hope you are well and are starting to make plans to move forward with your lives in a safe yet productive and enjoyable manner. We have much to be thankful for, as our office staff and their families here at Sterling Financial Group have remained healthy and all are looking to more normal activities.

Speaking of normalcy, the TSA has screened over a million yers for the past 18 days which is the first time we’ve reached those levels in over a year. Rail volumes are also up approximately 12% from a year ago, and car sales are running close to 16 million annualized units in the United States, another bullish sign for the economy. Importantly, consensus 2021 GDP growth estimates are now expecting the US to grow at 5 or 6% this year, as companies handily beat their earnings forecasts. All this points to a robust return to economic expansion, and that has led many to fret that the economy might be on the verge of over-heating and causing inflation.

One thing I am fairly confident about after more than 30 years in this business, is that when everyone is talking about one economic topic as the “sure thing” to happen, that “thing” is unlikely to be what happens. (Put another way, life is what happens while we are making other plans!) With so many now fixated on inflation, here are some thoughts on that topic: Media point to the record number of container ships waiting to unload cargo, or “stuff” that people bought. Others point to the rapid rise in the 10-year US treasury bond, now around 1.7% (but started the year at just under 1%). Still others notice the massive increase in certain commodities, like lumber or gasoline. Finally, others point to the huge increase in government debt in response to the Covid-19 pandemic as inflationary. 

Our belief is that most of these are temporary conditions that are unlikely to persist, although interest rates should certainly increase over time from their record lows. is is partly because Covid-19 restrictions disrupted supply chains, causing micro-chip or other shortages that has led to scarcity in some industries. For example, the shut-down of sawmills along with growing demand from Americans working on their homes is the biggest reason timber has skyrocketed, not that we don’t have enough trees. (See Wall Street Journal, Feb. 24, 2021, “Lumber prices are soaring. Why are tree growers miserable?”) Or take the airline industry - so many airplanes were taken out of service that a rise in demand will cause prices to rise quickly. e “invisible hand” of the market’s force will take care of these supply/demand imbalances. Each industry has some temporary issues, but longer term I believe the cost of computers, medicine, travel and yes even lumber, will come back to some historical norm.

We can and should note what other investors are focused on, but that does not drive our investment approach on your behalf. As activity resumes, we believe the economic surprises will continue to the upside and we are positioned to take advantage of those macro-economic trends. We look forward to speaking with you soon.

—Best regards, Michael