Improving Investor Behavior – Progress and Perspective

Headlines would have you believe COVID has left Americans in financial tatters, but when looking at the broad data, I can’t make the same conclusion.  

Make no mistake, COVID and the resulting restrictions have left a great many people struggling with their finances. Until we are back to “business as usual,” the situation for those folks is unlikely to get substantively better. But the narrative that COVID has upended our financial system is an easy one in which to get wrapped up and even easier on which to extrapolate. Remember, perspective is everything.  

Looking at our progress is a great reminder of how far we’ve come.  

I believe the data is pointing to substantial progress obfuscated by attention-grabbing and distracting headlines. Data seems to indicate that American individuals, families, and businesses may be in better shape than they have ever been when looking at several important measures.  

First, consider companies that are now sitting on the largest cash hoard ever. Moody’s Investor Services reports that non-financial companies are sitting on $2.1 trillion, an increase from a record $2 trillion peak in 2017. While cash holdings shot up in 2020, companies took on record amounts of debt to strengthen their balance sheets and refinance their previous obligations. Companies borrowed $2 trillion, another record going back before 2006. Businesses increased their operating flexibility during an uncertain time by borrowing at 30-year record low-interest rates. This would be like an individual obtaining an inexpensive line of credit from the bank to use if they need some extra savings. Flexibility is a smart move. 

Speaking of financial institutions, the Federal Reserve announced in January 2021 that banks passed their stress tests and are in better condition than expected. As such, the Fed is allowing banks to raise dividends and buy back stock. Instead of paying down low-interest debt with surplus cash, I believe banks will reinvest in their businesses, pursue mergers and acquisitions, and find other opportunities beneficial to shareholders, such as dividend increases or share buybacks.  

Businesses and banks look strong, so what about American households? Amid a pandemic, American incomes in 2020 were far higher than in all of history. Yes, some of that income included government stimulus and unemployment, but private wages, average hourly earnings, and average weekly earnings all made new highs. Unlike what we have seen historically, many Americans did not spend a significant amount of the increases on frivolities. They acted conservatively, paid down credit card debt (to the tune of $100 billion), and increased their savings.  

The bull market tailwind helped improve retirement plan account values, and the home values continued to increase. In summary, we are at a record high household net worth level of some $128 trillion and record low household debt obligations. Across the country, 37% of U.S. homeowners do not owe any outstanding debt on their primary residence! No mortgage, no home equity loan, nothing. Overall, household debt as a percentage of assets is 11%, down from more than 19% in 2008.    

The average American household is in the best financial shape of all time, with more cash and fewer debts than ever. This is not a surprise and not always a wonderful thing. Behaviorally, people tend to accumulate cash and pay down debt because of the emotion of fear. They prefer the security that comes with a cleaner balance sheet.  

Fear can also be seen in the movement of money, specifically inflows and outflows of investment dollars. Over the past three years (since 1/31/2018), the flow of money out of investments in what some consider “risky” investments like common stock totaled about $562 billion. The same period saw flow into what some consider “safe” investments like bonds of about $1 trillion. That’s roughly a $1.5 trillion swing from “risk-on” to “risk-off.” 

With interest rates recently rising, investors may see bonds lose value as rates rise. In February alone, the 10-year bond rose from 1.09% to 1.46%, the largest monthly increase since 2016. Investors not attentive to this will wake up later this year and wonder why the economy is stronger, but they lost money. As interest rates rise, bond prices decline. Even Warren Buffett reminded investors in his annual letter, “…bonds are not the place to be these days.” There are some nine million fewer jobs in the country than there were a year ago, and to a great extent, many of those jobs will be lost by the people who can least afford to lose them. We will see more widespread economic growth once we open our economy and remove government-imposed barriers preventing businesses from running at 100% capacity. The most effective antidote to poverty and inequality humankind has ever devised are jobs, commerce, and economic growth. Eventually, an economy can grow its way out of even the most severe problems; it cannot re-distribute its way out of them. The latest data around infections, vaccinations, and deaths all seem to be trending positive, yet several overly restrictive measures remain in place.  

Bureaucratic hurdles need to be quickly resolved. The longer we wait, the more severe the economic damage becomes. Perhaps this would be a better focus of our government’s time, rather than passing an additional stimulus package, which is a hammer solution to a scalpel problem.  

Businesses and people need to be released and be free to reopen. The financial seeds of an economic recovery have been sewn. The long-term prospects for the economy, and of the great companies that comprise it, are extremely positive. Perhaps more so at this moment than any time since World War II. We have all the pieces needed to build a better future. We need only the opportunity to do so.