Baldwin Investment Management

Believe in Miracles…

The year 2020 will probably be recounted by financial historians as a time of tremendous emotional distress, economic resilience and market surprise. Also, this turbulence happened in a very compressed span of time, about a year. The “Black Swan” which cast its shadow was COVID-19 and the pandemic circled the globe; something which the world had not experienced since the infamous Spanish Flu epidemic of 1918. As this commentary is being written, the first vials of vaccine to stop COVID are being shipped, people are being inoculated and a second vaccine has just been approved. In just 9 months scientists mapped the virus’ genes and produced vaccines which are 95% effective – a scientific miracle after considering that heretofore the average time to successful discovery of an effective vaccine for other diseases has approximated 10 years. So, indeed, there is a “light at the end of the tunnel”.

While the National Bureau of Economic Research (NBER), the ultimate arbiter of American recessions, has not yet officially called an end to the one that it declared earlier this year, there are many signs that the U.S. and indeed the world have emerged after suffering a deep but “record- shatteringly” short recession. One measure is depicted in the chart below – the ratio of U.S. Leading to Coincident Indicators. This standard looks at scores of economic statistics, some of which predict an economy’s direction (i.e. expansion or contraction) and others which contemporaneously measure the current state of an economy. Historically, this ratio rolls over well in advance of a recession and bottoms towards the latter stages of a downturn. As can be seen in Chart 1, not only has the ratio rebounded, but it is also near old highs set a couple of years ago.

Source: Bespoke Research

CHART 1

Other indicators of emergence would be the Small Business Optimism Index and Small Business Hiring Plans. In Chart 2 below, the Small Business Optimism Index has rebounded sharply, recapturing almost all of its earlier loss.

CHART 2

Similarly, hiring plans in small companies have vaulted to previous levels as demonstrated in Chart 3.

CHART 3

Please remember that small businesses in America are the largest employers in the country. So if small businesses are optimistic and are trying to hire workers, that should mean good things for the U.S. economy. Internationally, industrial production has bounced back sharply in the Eurozone with more room for expansion (see Chart 4).

CHART 4

Similarly, world trade (Chart 5) has rebounded, which is critical for growth and prosperity internationally.

CHART 5

If one accepts the premise that the world, but most particularly the U.S., is no longer in recession and has started another economic expansion – how long might an expansion last and how well might the stock market do? As to the first question, since December of 1900 the average duration of U.S. economic expansions has been 48 months with the longest (the expansion which just ended in 2020) having been 128 months.

Source: Bespoke Research

CHART 6

With regard to the second question, since World War II the S&P 500 has generated annualized returns for investors ranging from 3.2% to 14.4% with an average of 9.2% during economic expansions.

Source: Bespoke Research

CHART 7

Thus, if history bears any resemblance to the future, it would seem that economies around the world are at the expansion “starting line” and equity markets would seem attractive. With regard to derivative questions about absolute and relative market valuations, we have written about these over the past year and would encourage the reader to revisit earlier posts. However, we will submit another piece of evidence which supports our thesis that the U.S. stock market, while not cheap, is not wildly overvalued. As can be seen below in Chart 8, U.S. corporate profits through Q3 of 2020 have surged and completely recovered to their previous highs.

CHART 8

This provides good fundamental support for U.S. equity prices. Internationally, stock prices are not only supported by recovering earnings and cash flow – but also by much cheaper valuations than can be found in the U.S. The markets we believe to be “frothy” are bond markets around the globe with prices extremely high due to interest rates at historically low levels and not much prospect for rates to go lower.

Reflecting on this past year, man was humbled by an infection which many investors feared would “lay low” the world. Not since 1918 had the globe faced an invisible enemy which sliced through populations with little regard for gender, age, ethnicity or location. Before scientists “got their arms around” the virus, fear was rampant. But medical research responded and effective vaccines were discovered in a miraculously short time. Corporate management teams also responded. They adjusted their operating models to better “weather the financial storms” their companies were facing. As a result, company earnings, which many investors worried would be disastrous, came in much better than expected and improved throughout the year. People adapted. Scientists adapted. Managements adapted. So, as we look forward to 2021, we can see life returning to normal. It will not be immediate – as there are some difficult months ahead until there is widespread distribution of the vaccines and we achieve “herd immunity”. But normalcy is out there and a lot closer today than four months ago. During this Holiday Season, a season for miracles, our faith in the ingenuity and persistence of man has borne fruit and we can all look forward to better times ahead.


Predictions – How Did We Do In 2020?

  1. No recession is forecast for the U.S. Economy. No – There was a deep but very short recession brought on by the pandemic.
  2. Inflation in the U.S. will rise, but stay under 2%. Yes/No – Some “embers” of inflation, but nothing significant.
  3. Interest rates will stay low. Yes – And they will stay low through 2023 according to the Fed.
  4. Oil prices will remain rangebound & there will be more mergers and acquisitions. No & Yes – 2020 was marked by extreme volatility on oil prices due to the recession. There was a start to M&A activity & there will be more.
  5. Carbon emissions will not fall. No – Reduced economic activity during the year reduced emissions.
  6. International equities may have a day in the sun. Yes – Foreign stocks are gathering more adherents.
  7. A tale of two halves, perhaps. Yes – H2 2020 was the much better half of 2020.
  8. Objects in motion tend to stay in motion. Yes – It was the shortest “bear market” in history & stocks look to end the year on a positive note.
  9. There will be no big policy changes coming out of Washington D.C. Yes – Partisan gridlock is alive & well.
  10. Corporate America will continue to reward shareholders. Yes & No – Strong companies did reward their stockholders, while the weak could not during the pandemic.

Predictions for 2021

  1. Inflation will stay low.
  2. Interest rates will remain low.
  3. The dollar will weaken.
  4. Oil will stay in a pricing range of $50-$60/bbl.
  5. World GNP (Gross National Product) will rebound strongly.
  6. Corporate earnings will rebound strongly.
  7. Investor “risk appetites” will increase.
  8. International equities will outperform U.S. Equities.
  9. In the U.S., infrastructure spending will jump.
  10. U.S. stocks will have a good year with some rotation out of “tech darlings” into more economically sensitive names.

A Final Thought


The opinions expressed in this Commentary are those of Baldwin Investment Management, LLC. These views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.

The reported numbers enclosed are derived from sources believed to be reliable. However, we cannot guarantee their accuracy. Past performance does not guarantee future results.

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