The New Normal?

New terminology is an interesting byproduct of news events that capture our collective attention. At a minimum, little known terminology starts becoming the common language. It's safe to say most of us weren’t using terms like “flattening the curve” or “herd immunity” before this pandemic. As government leaders discuss the reopening of the economy, they almost universally caveat the reopening with the term “new normal”. The term new normal is not necessarily new, it’s been used before to describe what life will be like following a traumatic event. After 9/11, the term was often used to describe how different air travel would be, assuming anyone would even be willing to get on a plane again. Our observation is that the new normal oftentimes becomes the “old regular” rather quickly. Our expectation is that after a transition period, this will be the case with consumers, and therefore our economy. The United States' economy is truly unique among global economies. More so than any other major economy, the U.S. economy is driven by its domestic consumer. Other global economies rely much more heavily on exports and government spending to fuel their economic growth. Our economy’s primary driver has always been the consumer.

Contribution to U.S. GDP

The U.S. consumer has proven time and time again their willingness and desire to spend money. When we are happy, we spend money. When we are sad, we spend money. When we are melancholy, we spend money. If you lock us down, we take our stimulus checks, open up our laptops, and spend money. History tells us that so long as the consumer has money, or access to credit, they will spend. Overall consumer spending took a big hit in March, but not nearly as bad as feared. Online retail sales soared to record highs, offsetting a significant portion of our inability to spend money at traditional retail stores. Nature documentaries marvel at the ability of animals to adapt and survive in the harshest of environments. Perhaps it's time for National Geographic to produce a documentary on a truly unique animal, the U.S. consumer.

We mentioned before that we favor supply-side economics more so than demand-side economics. Here’s a copy of a previous commentary explaining why in more detail. That said, we are not ideologues. We are mostly in agreement with the recent demand-side measures to provide liquidity and float the economy during this unique period. A major reason why we are usually oriented toward supply-side instead of demand-side economics however is that the U.S. consumer proves time and time again they don't need an incentive to spend money, it’s simply what they do. Our belief is that providing stimulus through demand-side measures like monetary policy, or more recently simply giving people money, creates a short-term boost to economic growth but not a structural boost. Supply-side measures, specifically job creation, create a structural and more sustainable boost to economic growth. Currently, the economy is getting a boost from both sides. Our expectations have been that stocks would quickly bounce back, in the same manner that they quickly sold off. This is what history told us was likely and we are pleased to see this happening. "V-shaped recovery" is now common terminology among the non-economic crowd. Our concern is that the bounce back is a little too much a little too soon. While we are certainly not complaining, we are amazed at the bounce back in stocks during the 2nd quarter. The Small and Mid-Cap sectors have bounced between 25%-30% and Large Caps are up 20%. From its low point on March 23, the S&P 500 has gained 40% and is up 14% YOY. We expect markets to continue a volatile climb higher over the next year, but with a significant chance of a material pullback at any time. We have decided it makes sense to modestly pull back our stock exposure from an overweight to a neutral position. We are continuing to overweight the beaten up Small and Mid Cap sectors and tilt the portfolios towards Value-oriented stocks. More specifically, we are reducing our remaining overweight in equities (1% in Conservative to 3% in Aggressive). We are maintaining our strong domestic bias. We are also very modestly adding duration. Below is a chart showing our current over-under weightings followed by allocation percentages for the Core Portfolios.

If you would like to discuss your portfolio in more detail please reach out to us. We've spent considerable time during this pandemic upgrading our technology and simplifying our screen share capabilities. We would love to show them off. Shop till you drop, The GreenPort Team