Year of Electric Vehicles: What will Shape EV Trend in 2021?

Year of Electric Vehicles: What will Shape EV Trend in 2021?

The ascent of Tesla, both in valuation and ingenuity, has been one for the ages. Elon Musk has been a polarizing figure, but it is certain that he has strongly contributed to the adoption of electric vehicles (EVs). Despite the limitations of the range of the vehicles, lack of charging stations, and a premium price, consumers are increasingly becoming interested in owning vehicles that are seen as more friendly to the environment.

Acceleration of Choice

While Tesla vaulted out to a head start, offering cars that are both functional and fashionable (certainly relative to the Chevy Volt or Nissan Leaf), automakers are expected to roll out EVs in 2021 at a much more rapid pace. Rolling Stone wrote an article on “12 Electric Cars to Look Forward to in 2021”, featuring some of the most anticipated offerings. Ford will enter with a version of the Mustang, Mercedes will have a luxury offering, and we will even see an electric version of the (formerly) gas-guzzling Hummer. More startups will potentially offer their electric vehicles in 2021 as well, with rumored EVs coming from Rivian and Lucid, among others. 

But…..Tax Credits are Starting to Run Out!

Did you know that there is a generous $7,500 tax credit for buying an electric vehicle? If not, this may be an attractive benefit that may cause you to look closer at EVs. While these cars are almost always more expensive than their gas-powered cousins, this is an attractive benefit. The downside is that once 200,000 cars are sold by a manufacturer, this tax break evaporates….so say goodbye to the tax credit for Tesla and GM. That being said, the Growing Renewable Energy and Efficiency Now (GREEN) Act – still in its early stages – could move the tax credit threshold to 600,000 cars, if it passes. That legislation would carry with it a $7,000 tax credit for vehicles sold between the 200,000 and 600,000 thresholds. 

To find out more on who is eligible, see this blog post. The U.S. Department of Energy also offers this really helpful car-by-car breakdown of tax credits and phase-out timeframes. 

Growing Charging Networks

According to an EV charging blog post from Car & Driver, “most plug-in owners charge at home over 80 percent of the time.” For those that find themselves running low or unable to charge at home, the charging networks have quickly been growing. Tesla has its own charging networks exclusive to their vehicles, and there is an industry standard called SAE J1772, or U.S. Standard Level 2, that will work with every electric vehicle on the road today. Additionally, there are DC fast-charging stations that are becoming more available that will charge batteries at a much more rapid rate.

A close-up view of two different types of charging ports in an electric vehicle

A peek under the “hood” of an EV charging port. The standard J1772 electric power receptacle (right) can receive power from Level 1 or Level 2 charging equipment, while the CHAdeMO DC fast charge receptacle (left) can charge a battery up to 80% in two hours. Photo source: energy.gov

What About Fuel Costs?

For EVs, it’s all about the kilowatt-hours (kWh). Here is a good resource from the U.S. Energy & Information Administration to determine kWh costs near where you live. In Wisconsin as of the writing of this blog post, it was 14.80 cents/kWh on average for residential residences. That doesn’t tell the whole story, however. Kilowatt-hour cost will vary depending on when you access the power grid, so charging at strategic times is beneficial to keeping your costs down. Tesla has some capabilities built in to take advantage of this, turning on the charging at optimal times as well as syncing with your calendar to determine how much you will be driving the next day and therefore how much charging it should do.

So is it less expensive to “fill up” an EV versus a gas-powered car? It’s likely but not certain, as it will depend on whether you use a fast-charging system and it again depends on when and where you do the charging. Read a bit more on the nuances of fuel costs here.

So Are Electric Cars a Good Investment?

We always cringe when we have the moniker of “investment” placed on an asset that is depreciating over time. Conventional wisdom says that EVs being the hot cars of the moment would lead to better resale value; however, with battery technology improving and many more choices becoming available in the market, resale numbers are looking worse, not better. However, with its over-the-air updates, Tesla seems to be an exception to the rule. Even then you may be only a short while away from a game-changing technology that renders previous battery technology obsolete, such as “solid-state” batteries, an exciting and fascinating recent development that could change cars forever. While EVs are certainly going to be massively implemented during the decade of the ‘20s (with even more exciting developments in self-driving technology!), it’s hard to claim that these will be solid investments that will hold their value. 

Clint Walkner


This piece was part of Walkner Condon’s 2020 Review & 2021 Investment Outlook Guide, a comprehensive interactive PDF covering a wide range of subjects and trends, including the S&P 500, electric cars, and more. To read the full guide, please click the button below.

Fixed Income: COVID recovery, economic growth are key factors in 2021

Fixed Income: COVID recovery, economic growth are key factors in 2021

The novel coronavirus brought upon us unprecedented shutdowns and economic turmoil in the first half of 2020, and there was no greater impact on righting the ship than the Federal Reserve. In the midst of our economy grinding to a halt and our GDP cratering, Federal Reserve Chairman Jerome Powell brought interest rates down to zero, and the central bank used a number of different tools in its repertoire to help the struggling economy and businesses navigate the shutdowns. These moves helped to prevent an even more dire situation, but it has left investors that rely on fixed income in a precarious position in the trade-off for receiving steady income from your money vs. the risk of capital to reach for a higher yield. 

2020 returns on fixed income securities were strong due to the actions of the Fed. When interest rates drop, the price of bonds goes up, and you tend to see higher returns. It does not seem likely that the Fed will raise interest rates in 2021, and that could be as far out as 2023 if the economic impact of COVID-19 continues to dampen the U.S. economy. This portends a positive outlook in the short term for bond investors, but yields on fixed-income investments will more than likely be lower for longer due to the outlook for short-term rates. This does not mean that fixed income will not be an important part of a diversified portfolio for 2021 and beyond, however.

Money-Market and Cash Deposits

The short-term road for cash and money market investments looks bleak as the short-term rates are expected to be kept at, or near, zero moving forward. It will be difficult to earn a meaningful return on these deposits, but they will continue to be attractive for defensive investors who do not want to lose principal because of the lingering economic uncertainty due to the coronavirus, a new administration, and new Congressional economic policies.


With the economy continuing to recover and the COVID-19 vaccine in the process of being rolled out, we should see the yield on the 10-year treasury increase. The Federal Reserve looks to normalize this yield as the economy strengthens, seeking to control inflation. If inflation increases as it is expected to, we could see intermediate yields rise and reach a range of 0.5% to 1.6%. Short-term rates will more than likely remain at or near zero as the Fed wants to continue to prime the pump of the economy and keep money cheap.

Graph of the 10-Year Treasury Yield Comparing Nov. 2019 and Nov. 2020

Source: Bloomberg. 10-Year Treasury Yield and a Proprietary Multifactor Fair Value Model of the 10-Year Treasury, using JPMorgan Global PMIs, Inflation Swaps, and the Term Premium. (USGG10YR Index, MPMIGLMA Index, FWISUS55 Index, ACMTP10 Index). Using monthly data as of 10/31/2020. Past performance does not guarantee future results.

This should help businesses borrow to remain in business and even expand as the economy continues to recover. Treasuries are attractive because they are safer investments due to the fact that they are backed by the full faith and credit of the U.S. government. In the risk-reward world, this causes them to have less of a return than other fixed-income investments that require more return for the inherent risks of investing in them. Their safety and relatively modest returns should continue throughout 2021.

Treasury Inflation-Protected Securities (TIPS) can be helpful to fixed income investors in 2021 and beyond to protect against inflation risk during a rising interest rate environment and can be an important part of a fixed-income portion of a portfolio. With short-term rates having nowhere to go but up, they should be a good inflation hedge.

Corporate Bonds

2021 should create an opportunity for investment-grade corporate bond investors, but it is important to look to keep duration shorter in these investments. Duration is the time it takes for a bond to return the coupon and principal back to an investor; it can fluctuate based on interest rate changes and can be managed through diversification and bond-laddering. Credit quality is important as well because ultimately, these investments have the risk that the bond issuer could become insolvent—though at least the bondholders are ahead of the shareholders in line for payment in a bankruptcy proceeding. If you are looking for higher-yield bond returns, then you will more than likely need to invest in issuances that have more credit-quality risks. With bond yields being lower due to lower interest rates, it will be important to guard against overexposure to these investments in the search for a higher-yielding portfolio.

Global Bonds

The global bond outlook for 2021 will have a lot to do with how the valuation of the dollar moves. If the dollar weakens as it did at the end of 2020, then we should see strong overall returns in this asset class as the native currencies strengthen. As the U.S. government continues to stimulate the economy with an influx of borrowed money, and the Fed’s policies remain dovish, global bonds should become more attractive for foreign investment to fill the gap due to low yields and returns on U.S. debt. Improving global economic conditions as we come out of the coronavirus pandemic, in addition to accommodative central banks, should make this an attractive asset class in 2021. However, there is still more risk in global bonds than in U.S.-backed treasury bonds and other higher-quality issuances.


It is difficult to predict how soon the U.S. and global economies will recover from the COVID-19 pandemic. But, if there is continued economic growth, investors could find yield and returns in fixed-income. It could be a choppy year in these asset classes as central banks continue to use their tools and programs to stabilize the economy, so it will be important to monitor quality and diversify your fixed-income holdings.

Jonathon Jordan, CFP®


This piece was part of Walkner Condon’s 2020 Review & 2021 Investment Outlook Guide, a comprehensive interactive PDF covering a wide range of subjects and trends, including the S&P 500, electric cars, and more. To read the full guide, please click the button below.

The Evolution of the S&P 500: Where Do We Go From Here?

The Evolution of the S&P 500: Where Do We Go From Here?

The year of 2020 was a very strange one indeed. For the U.S. stock market, however, if you looked at the beginning and the end of 2020, you’d see the S&P 500 up about 16.6% and conclude that this year was merely more of the same ol’ U.S.-dominated bull market that prevailed throughout the prior decade as U.S. stocks led global markets out of the very deep bear market experienced during the Great Recession. The leadership experienced by the blue chip S&P 500 stocks over smaller stocks indeed persisted in 2020 just as large caps have outperformed small and mid-cap stocks over the bulk of the post-recovery bull market. The similarities don’t end there, as 2020 was a year again dominated by winning sectors within the S&P that have been doing the heavy lifting for quite some time, led by mega cap darlings that epitomize innovation and success in their dominance of our digital economy. Here are the top three sectors ranked by performance in 2020:


Yes, those predicting the demise of “FANG” stocks are going to have to wait at least another year (or another 10 years) for vindication, because COVID-19 not only caused investors to gravitate toward what few stocks were still showing earnings growth, it actually caused businesses and consumers alike to lean even more heavily on the digital economy in their day-to-day affairs to navigate the new reality of pandemic, lockdowns, and social distancing. Indeed, it’s entirely fair to say that many of the trends that had long benefited the digital economy stalwarts, such as the migration to social media, streaming entertainment, online shopping, etc. truly accelerated further because of the Covid-induced recession.

On the other side of the coin, 2020 and the Covid-induced recession predictably brought on hard times for those parts of the S&P that contracted sharply from an environment of staying at home, shopping online, and near-zero prevailing interest rates. These are the three worst performing sectors of 2020, which all managed to finish in the red (as did utilities) in a well above average year for the S&P 500 on the whole (percentages shown are negative):


So, we see that 2020 was a year that no one will likely ever forget, and yet, from the perspective of the S&P 500 index, it was very much a continuation of 2019 and before, with the largest growth stocks leading a new digital economy and doing almost all of the heavy lifting underneath the surface of a rampaging S&P 500, while value/dividend investors suffered yet another disappointing year of dramatic underperformance.

Let’s put this technology-driven trend in proper perspective, comparing the S&P 500 at the dawn of the post-Great Recession recovery to the end of 2020. Pulling figures from this blog from DataTrek research last March, let’s consider the migration during this nearly 11-year period for the leading and lagging sectors of 2020 in terms of their share of the overall S&P 500. Keep in mind, of course, that the communications services sector did not exist in 2009, so we’ll follow DataTrek’s appropriate and reasonable lead and put Alphabet and Facebook back in the technology sector, and return Disney, Comcast and Netflix back to the consumer discretionary sector (leaving the traditional telecom stocks out of the equation as there is no comparing the old telecommunications sector with the current “communications services” sector). Likewise, real estate was not a recognized separate sector in 2009, so we must also return the real estate stocks to the financials sector to fairly compare 2009 and 2020 figures. Here are the approximate weightings in the S&P 500 for the traditional technology and consumer discretionary winners of 2020 and the energy, real estate and financials laggards of 2020 vs. their relative S&P 500 weightings in March of 2009 (the dawn of the great bull market recovery):



CONSUMER DISC. 14.2% 8.9%
ENERGY 2.3% 13.0%
FINANCIALS 12.8% 10.8%

Those numbers put the two obvious megatrends at the sector level within the S&P into a clear numerical perspective. First, technology was the largest sector at the dawn of the post-Great Recession bull market, and its share of the S&P 500 pie has somehow doubled in size during this period to now constitute nearly one-third of the index. Second, companies that extract dinosaur fossil materials (energy) from the earth are now on the verge of extinction within the S&P, as energy’s sector weighting declined about 82% during this period.

As Clint’s discussion of the electric car megatrend thoughtfully points out, Teslas consume energy, too, right? Clearly, the secular and technological changes in the industry that brought oil below $20 at one point in 2020 have dramatically altered investors’ appetites for crude and its derivative products, and the ESG trends that Mitch discusses clearly aren’t helping, either.

Trends persist, often much longer than most imagine they can persist, and this has been a classic example within the S&P 500 for years. However, there is no bigger curse for investors than to be late to the party. Even the most persistent trends eventually give way and reverse course, and often violently. Think NASDAQ circa 2000 with the pricking of the internet bubble. That was a painful time for many investors that bought into the idea that the secular trend of internet adoption would rewrite the rulebook on investing and that traditional fundamental analysis of technology/internet investments was no longer applicable. This was an age when I distinctly remember repeatedly hearing the most dangerous four-word sentence on Wall Street: “This time it’s different.”

Would we dare utter those words today? What if I told you that the Information Technology sector of the S&P 500 in December was trading around 45 times trailing one-year earnings, and about 40 times the estimated earnings for the coming year, while the Consumer Discretionary sector was trading at 85 times trailing one-year earnings and 38 times estimated earnings for the coming year? That seems quite frothy indeed. This illustrates a major premium that has been paid (and continues to be paid) for growth, not at a reasonable price, but at any price, in a world where there was (and there remains) a scarcity of growth (i.e., the Covid-induced recession). 

However, there are many metrics by which we can judge the current S&P 500 in the context of history. I recently revisited one thoughtful article from October 2018 by a very seasoned Wall Street veteran who expressed concern about the froth within the S&P 500 back in 2018, echoed my revulsion of the most dangerous sentence ever heard on Wall Street, but keenly observed that adjustments in historical time frames could dramatically alter the perception of relative froth in the S&P 500. There truly is a data point for every argument.

Therefore, as we happily put 2020 in our rearview mirrors and look to the future promise of 2021, what can we expect for the S&P 500 and its component sectors? Prognostications are dangerous and common sense negates the follies of both ignoring a trend and blindly riding a trend into oblivion. In other words, it would be unwise to overly commit to the notion that, because the S&P 500 has led world stock markets, and technology, communications services, and consumer discretionary stocks have dominated the S&P, that you should cash in your chips and place all bets elsewhere. On the other hand, the magnitude of the outperformance of the S&P 500, and particularly of those sectors and mega cap stocks most responsible for that outperformance, has increased the risks associated with those investments relative to other sectors within the S&P 500 and relative to other stock indexes, foreign and domestic. 

The prescription for navigating the market ahead is an ageless remedy:

  • Examine your portfolio and the underlying allocations to U.S. stocks, to sectors within those U.S. stock holdings, to non-U.S. stocks, to bonds, to alternative investments, etc.;
  • Determine the extent to which the trends discussed above have left your portfolio over-exposed to U.S. stocks and particularly to the growth stocks and the favored growth sectors that have led the S&P 500 to new heights in 2020; and
  • If you determine that the weightings in your portfolio make you uncomfortable with the potential eventuality that money flows reverse away from these investments into more neglected segments, sectors, and regions within the global stock markets, then by all means REBALANCE — sooner, rather than later.

Given the new highs for all the major stock indexes in the U.S., it is probably safe to assume that investors, in general, are anticipating a smooth rollout of Covid vaccines as we move into 2021 and a major economic rebound as life starts to return to something resembling normal. If this occurs, we could very well see outperformance in sectors of the S&P 500 that massively underperformed in 2020, and that could very much come at the expense of 2020’s market stalwarts. After all, for money to move to the less-loved sectors of the S&P, it has to come from somewhere and, right now, practically one-half of the money in U.S. blue chips is in technology (infotech and comm. services) and consumer discretionary stocks. More breadth in a rising market would be quite welcome. However, only time will tell whether and to what extent the underlying economy will have a robust recovery and to what extent the current pandemic has produced long-term fundamental shifts within the economy that could provide continued challenges for certain sectors and industries within the domestic and global economy. 

Stan Farmer, CFP®, J.D. 


This piece was part of Walkner Condon’s 2020 Review & 2021 Investment Outlook Guide, a comprehensive interactive PDF covering a wide range of subjects and trends, including the S&P 500, electric cars, and more. To read the full guide, please click the button below.

Another Banner Year or Start of a Drop? The 2021 U.S. Real Estate Market Outlook

Another Banner Year or Start of a Drop? The 2021 U.S. Real Estate Market Outlook

The challenges of 2020 were numerous and seemed unrelenting at times. It was difficult to find the silver lining in a year full of grey clouds. That said, there were a few bright spots in the financial world. The three major U.S. stock indices were all positive for the year as well as the domestic real estate market. Despite the headwinds of COVID, high unemployment, and strained budgets, real estate values continued to push higher with low inventories and historically low-interest rates helping to fuel the fire. The housing market will correct at some point, as all markets do, but will 2021 be the beginning of the drop or another banner year? 

A Brief Recap of 2020 

The U.S. real estate market posted another strong year of sales in 2020. The energy from 2019 continued right on through the majority of 2020. Due to COVID ramping up in the U.S., the first quarter and the beginning of the second quarter forced real estate professionals to adjust from in-person showings and open houses to a more virtual environment. Buyers adapted well to these changes and continued their frenetic pace. Attractive interest rates and low inventories created the perfect environment for sellers to receive top value for their homes.     

The Factors That Could Derail The Housing Market

The landscape for the 2021 real estate market looks quite encouraging, according to many of the experts in the industry. There are a few factors that will have a significant impact on the real estate market. These three factors are especially important because any one of them could be the impotence for a market cool down: 

1. COVID – We have all adjusted our lifestyles to best protect ourselves from the pandemic by reducing contact with others, limiting our travel, and wearing masks. However, if the pandemic really begins to accelerate or a new strain is introduced and causes panic, we could see people limit their exposure events further. Furthermore, if job losses increase, this could make potential buyers and sellers pause any housing activity. This could have a big impact on people’s willingness to go through the buy/sell process.

2. Remodeling – The “new normal” of working remotely and being more self-sufficient at home is creating a perfect environment for people to remodel their existing homes to better fit this lifestyle. People are renovating kitchens, finishing lower levels, and adding offices and workspaces to adapt. This runs counter to the idea of selling a current home and upgrading to a home with those features already in place. The demand for remodeling will likely create the momentum for another positive growth year in that sector.

3. Jobs – The U.S. economy has struggled with high unemployment as a result of the pandemic. Typically, high unemployment will absolutely slow down the real estate market, however, the housing demand stayed strong throughout 2020 in spite of high unemployment. That said, if the unemployment numbers worsen into 2021, then housing may start to feel the effect. 

The Tailwinds That Could Power The Market Through 2021

1. Housing Inventory – For the majority of markets in the U.S., the number of houses on the market isn’t enough to satisfy the number of people looking to purchase a home. This imbalance has helped to push values higher and keep the real estate market momentum strong over the last few years. However, if this imbalance corrects itself by a jump in new construction or more people deciding to sell their homes, the market would adjust and values would flatten out. The chief economist at Realtor.com is predicting new home starts will be up 9% in 2021. However, it doesn’t seem likely to slow the demand in 2021 as both of those variables take time to influence the market.

2. Interest Rates – Mortgage rates have been trending down over the last 2+ years as the 10-year Treasury yield continues to fall. The relationship between mortgage rates and the 10-year treasury is quite strong and has been decades. The friendly interest rate environment being utilized by the Fed is likely to continue, at least into, if not through the year 2021, which will keep mortgage rates at or near all-time lows. This is a huge motivating factor for buyers looking to purchase a home.

3. COVID Vaccines – While the initial rollout of the COVID vaccine is running at a slower pace than what was predicted, the experts believe that we will be back on track within the next month or two and hopefully have the majority of Americans vaccinated by mid-year. This could go a long way to instill confidence in the general public and provide additional fuel for an already hot real estate market, especially if real estate professionals can resume in-person showings for the late spring and summer months. The summer months could be phenomenal if consumer confidence accelerates. 

Outlook for 2021

Barring any unforeseen circumstances, as we all struggled with in 2020, the trends are leaning towards another strong year in the real estate market. We are likely to see the tailwinds mentioned earlier prevail for the entirety of 2021 and demand should continue at the previous year’s pace as a result of not enough inventory. Real estate markets, especially in the Midwest, tend to correct slower than the stock or the bond markets. The coastal markets in the U.S. do move faster and will be more susceptible to unpredictable events; however, the momentum is still strong across the country. The variables are in place for demand to outpace supply and attractive financing options to continue for at least 12 more months.

Nate Condon


This piece was part of Walkner Condon’s 2020 Review & 2021 Investment Outlook Guide, a comprehensive interactive PDF covering a wide range of subjects and trends, including the S&P 500, electric cars, and more. To read the full guide, please click the button below.

QE & Adventures in a Fed-Driven Market: 2020 Market Recap and 2021 Outlook

QE & Adventures in a Fed-Driven Market: 2020 Market Recap and 2021 Outlook

Technically, the record-breaking bull market that started in 2009 ended in 2020. I say “technically” because the sell-off was so short-lived that it almost didn’t feel like a true bear market, and the rebound was so sharp that it didn’t feel like a proper recovery. As we continue to emerge from the Q1 shock, our new bull market sure feels a lot like the continuation of the previous decade-long uptrend, with the same drivers (low rates, central bank intervention) and the same dominant sectors (with big tech leading the way). 

Last year’s events left many investors with a feeling of unease at the disconnect between the economy and the market. Many were already skeptical about valuations prior to COVID. When a brief collapse was immediately followed by a moon-shot to unthinkable new highs, investor skepticism rose along with it. This is perhaps the most common point of concern for our clients: how can weak economies, with falling demand and rising unemployment, justify higher equity prices? When faced with this question, I’ve often tried to draw our clients’ attention to the prodigious scale of the monetary measures being implemented, and to the fact that the link between markets and the economy isn’t always as direct and linear as many investors expect, as we will discuss later. 

One way or another, it’s largely been about the Federal Reserve and their international counterparts (ECB, BOJ…), and while 2020 will probably be remembered as the year when everything changed, as far as markets are concerned, we seem to be trapped in the same powerful dynamics that were in place a year ago, and which have become even more deeply entrenched as a result of the pandemic.

Fun With Trillions

At the beginning of 2020, many observers would have described global monetary policy as extremely loose, historically so. Part of the bearish narrative was that central banks had run out of ammunition: with both ECB and Federal Reserve balance sheets hovering around all-time highs, and interest rates near zero, surely there wasn’t much left for central banks to do. 

As it turns out, they were just warming up. 

Keeping up with monetary policy and high-flying government finance requires a rare skill: the ability to make sense of large — very large — numbers. Can anyone really wrap their minds around numbers like 665,900,000,000,000 — or 666.9 trillion — the approximate size of the Bank of Japan’s balance sheet in Yen? 

Central bankers and politicians seem to deal only in rounded trillions nowadays: the first COVID relief bill was 2 trillion dollars, the ECB expanded its Quantitative Easing (QE) program in June by 1.3 trillion Euros, and so on…and with every new trillion-dollar headline, the world of big finance grows increasingly disconnected from reality, almost like it exists in its own parallel universe. 

Trying to relate the idea of trillions of dollars to something tangible would look something like this: if you had 1 million dollars in a compact stack of 1,000 dollar bills, the stack would be approximately 4 inches in height. A million is a lot of money by any standard, yet it’s small enough to carry in a handbag. To get to a billion dollars, the stack of 1,000 dollar bills would have to grow to about 358 feet, or about 50 feet higher than the Statue of Liberty. To get to a trillion, the stack would need to grow to a length of approximately 67.9 miles. (1)

Central bankers don’t need to worry about the logistics involved in printing and shipping 70-mile long stacks of bills, they save themselves the hassle by creating currencies in electronic form, but the impact on markets of their various trillion-dollar endeavors are just as real. 

To understand why 2020 was truly the year of “Fun with Trillions”, consider the following chart:

The main global central banks have added nearly 8 trillion dollars to their combined balance sheet in 2020 alone. Source: Atlantic Council global QE tracker

The Federal Reserve added 3.2 trillion dollars to its balance sheet in 2020 alone, more than it did in the entire 2009 to 2019 period. Source: fred.stlouisfed.org

Over 20% of the U.S. money supply (measured a Money of Zero Maturity) was created in 2020 alone. Source: fred.stlouisfed.org

So what does this all mean? Therein lies the issue for investors — we can observe trillions of dollars being (digitally) printed and hear about it on the news, but what does it mean for markets? How does that relate to the size of our 401k’s? Or Apple’s share price? What would today’s markets look like if QE had never existed?

One team of analysts at Société Générale did attempt to answer this thorny question. (2) Sophie Huynh and Charles De Boissezon, of the bank’s equity research group, used a regression analysis to estimate the impact of QE on treasury yield. They estimate it at about 180 basis points cumulatively since 2009 (in other words, without QE the 10-year yield would be close to 3%). They then used a dividend discount valuation model and the bank’s proprietary model for equity risk premiums (the excess return of equities of bonds) to derive a hypothetical valuation of stocks without QE. 

Their results are rather striking.

As shown above, the impact on stocks’ prices has been dramatic according to their model and even more pronounced in the NASDAQ than the S&P 500.

Overall, the bank’s model estimates that 44% of today’s S&P 500’s price level can be attributed to QE. In the tech-heavy NASDAQ, the percentage rises to 57%. The pace of change has not been linear, and 2020 saw a massive spike in the percentage of price level explained by QE.

We’ll never know how accurate this model truly is, but I believe it captures one fundamental truth about current market conditions, which is simply that QE changes everything. 

With the 10-year yield over 3%, and the S&P 500 at 2000, markets would certainly not be as exciting as they are today, but some might say that they would be a more honest reflection of the economy.

The eternal bullishness of a stagnant economy 

Whatever QE’s impact on the market might have been, it’s unclear whether it has benefited the economy in any meaningful, lasting ways. The pace of U.S. economic growth has generally been around 2% for nearly a decade until 2020.

Early forecasts indicate a decline in U.S. GDP of around 3.5% in 2020, though it’s expected to rebound in 2021. Meanwhile, corporate earnings have barely grown in the last few years, even as markets soared to all-time highs.

This environment of stagnant economies and earnings growth has prompted many to speculate that markets have risen too far, too fast, and these concerns are valid. After all, QE or not, one would expect economic realities to eventually catch up with markets. All else equal, slowing earnings growth should result in lower stock prices. With that being said, we must also keep in mind that the market and the economy are two distinct entities.

In a recent research piece, Vincent Deluard (StoneX’s head of macro research) makes a simple yet counter-intuitive point which I think helps capture a lot of today’s market dynamics. His view can be summarized as follows: in an environment of secular stagnation, where discount rates and growth decline, stock prices will soar. To understand his point, it helps to review some very basic concepts of equity valuation. 

Stocks are ultimately just claims on a future stream of cash flow, a dividend for example, or whatever might correspond to the liquidation value of a company. Any stream of future cash flow is valued by dividing the periodic cash flow by a discount rate, which accounts for the time value of money, and for risk. For example, a hypothetical annual payment of 10 dollars that lasts forever would be valued by simply dividing 10 by 5% (if we assumed a 5% discount rate): 10 / 0.05 = 200, so this perpetual cash flow of $10/year is worth $200 dollars today.

Equity valuation works in a very similar way, but the discount factor is slightly more elaborate. One example of a basic stock valuation model is the Gordon Growth Model, which works with the formula on the left.

This is conceptually very similar to our perpetual annuity example. The discount rate “r” can be thought of as the rate of return that investors require for the stock, the constant cost of equity capital. Because company earnings grow over time, “g” is added to account for growth, and reduces the discount rate, causing the value of the ratio to increase (the stock price to rise).

Going back to our example, imagine a company (let’s call it Stagnant Inc.) that pays a $10 annual dividend per share. Stagnant Inc’s share price could be valued as follows using the Gordon Growth Model:

10 / (0.10 – 0.5) = $200

In the above example, 0.10, or 10% is the “r”, the discount rate, the return investors expect, and 0.05 is the 5% growth of the company’s dividend. If we assume that Stagnant Inc.’s growth rate declines by 10% a year going forward, and that the expected rate of return “r” also declines by the same 10%, the stocks price over a 50 year period would like this:

In 50 years, Stagnant Inc.’s stock price soared from $200 to over $34,000, a gain of over 11% a year, all happening despite a steady decline in earnings growth. This is what Vincent Deluard refers to as “the crazy math of secular stagnation.” (3)

Source: Vincent Deluard, StoneX research, www.marketintel.stonex.com

As shown above, lower capital costs (discount rate) can justify higher valuations even in the face of dwindling earnings growth. As both growth and discount rates trend towards zero, prices rise to infinity.

This is perhaps what many investors have missed when constantly expecting markets to fall back to earth: while there truly is a disconnect between the economy and markets, there may also exist a causal link between economic weakness and higher stock prices, a self-reinforcing trend of perverse incentives where slow growth fuels market uptrend, where bad news for the economy can quite literally become good news for stocks, and markets may have been riding this stagnation boom for many years now. 

I would add that QE and central bank interventions are factors that will tend to affect expected returns over time. In markets, the cost of equity capital is mainly a function of interest rates, volatility, and risk premia. By keeping interest rates low and dampening volatility, central banks’ activity can really be thought of as one giant exercise in reducing expected returns. When the Federal Reserve announced that it would start buying high yield bond ETFs, the prices of these bonds quickly jumped. There is nothing irrational about this investor behavior. If a high yield bond had a yield of 6% prior to the Federal Reserve’s decision to step in, once the Fed enters the fray, investors were happy to accept a lower yield, maybe 5%, simply because they knew the Fed would step in to support prices as needed. Equities work the same way. In a world where any weakness or volatility is met with the immediate expansion of the Fed’s balance sheet and trillions in government intervention, you would expect equity investors to feel more comfortable and adjust their risk appetite. For example, a stock that an investor would have normally considered too risky to buy (perhaps a high-octane IPO), can suddenly become a very justifiable acquisition once the Fed’s de-facto pledge to support markets is factored in. Coincidentally, more IPOs have doubled in price in 2020 than any year since the tech bubble. (4)

This reasoning can be pushed even further to explain some of the current sector dynamics: in a world of constantly falling cost of capital, equity valuation becomes disproportionately affected by cash flow duration. To draw a parallel from the bond world, if we knew that rates were going to consistently decline, we would naturally look to buy the longest-dated bonds (maybe a 20+ year treasury). Likewise, if the equity cost of capital is constantly falling, winning the equity valuation race becomes a game of who can extend cash flow duration the furthest into the future. 

This may at least partially explain why today’s dominant stocks are to be found in the tech world. As highlighted in StoneX’s report, U.S. tech giants, with their low payout ratios, low book values, and future-proof product lines, can be thought of as the equity equivalent of a very long-dated bond and will benefit the most from the falling cost of capital. The SocGen report referenced earlier also highlighted that the tech sector’s outsized benefit from QE for similar reasons. 

In the game of ever-increasing cash flow duration, current earnings and profitability are secondary to future cash flows. Any company with a semblance of growth enters the race to a near zero-value denominator and is disproportionately favored by investors. Similarly to how aggressive bond traders might look to increase the convexity of their books (buy bonds with the highest duration sensitivity to changes in yield), equity traders could be chasing stocks with the greatest pace of price appreciation for a given decline in capital cost, endlessly bidding up speculative growers in the tech world, at the expense of value and yield. 

These ideas would certainly be consistent with what we witness almost daily in today’s market, which appears to be obsessed not just with innovation, but with all manners of futuristic buzzwords. In today’s world, computing is not enough, you need quantum computing, automation is not enough, you need AI, databases are not enough, you need blockchain, trucks are not enough, we demand cybertrucks.

But of all the tech-obsessed endeavors, my favorite is probably space exploration. When it comes to creating the longest cash flow duration imaginable, I can’t think of anything better than spending the next few decades burning through trillions of dollars building spaceships, all in the hope of one day dominating the intergalactic travel market. So it is perhaps no surprise that just about every billionaire CEO seems in love with the idea: Elon Musk has SpaceX, Richard Branson has Virgin Galactic, Jeff Bezos has Blue Origin. In a day and age when life on earth seemingly requires a constant supply of face masks, antiseptic wipes, and experimental vaccines, perhaps the time has come for us to propel ourselves into outer space in search of less green pastures. After all, life in one of Elon Musk’s planned human colonies on Mars can’t be all that much different from being locked down in a Berlin suburb. (5)


In his book “The Systems Bible” John Gall introduces a concept he calls “operational fallacy”, which describes instances where systems do not do what they say they do. The best way to explain operational fallacy is to think of a simple term like “fresh apples.” Fresh apples can evoke the thought of strolling through your grandmother’s garden on a late summer day, and picking ripe apples right off the tree, perhaps to make a delicious pie later that day. But “fresh apples” could also be an item you grab from the shelf of a suburban supermarket while quickly pushing your cart down the produce aisle one evening after work. In both examples, the term “fresh apples” is technically correct, yet the two products and experiences are nothing alike. What most people really want is grandma’s apple experience, but that’s exactly what the system cannot provide.

2020’s pandemic and the ongoing economic struggles of the last decades have prompted leaders around the world to implement a variety of support measures to stimulate the economy. Those same decision-makers would no doubt congratulate themselves on what they perceive to have been decisive and successful steps that secured the economy, fostered growth, and protected the integrity of markets through difficult times. Yet the results produced by this complex system of incentives hardly match what most would look for in a prosperous economy. The economic equivalent of grandma’s apple would probably involve a combination of plentiful well-paying local jobs, healthy government finances, and growth. Instead, the current economic landscape delivered stagnant growth, gig-economy, and soaring deficits. 

Perhaps these support measures are more likely to produce supermarket apples: the mechanism through which quantitative easing (by far the largest component of all stimulus attempts) benefits the economy is still unclear, and one could argue that QE is in fact counterproductive. Instead of promoting growth, easy money and low rates may instead lead to misallocation of capital, leading to weaker economies and fueling the vicious cycle of stagnation. 

What these measures did achieve was a spectacular rally in stock price, and this may be because QE is more akin to a form of price control than an economic stimulus. Historically, price control has involved various attempts to reduce the price of goods to curb inflationary forces, but we have no need for that type of price control now. In today’s upside-down, hyper-financialized world, we’re instead attempting to generate growth and inflation by controlling the price of risk, the cost of financial capital. Global markets are supposed to be way too large to be controlled by anyone, but trillions of dollars have a way of coercing even the strongest forces of their will. 

Attempts at price control generally have a terrible historical track record, and while I spent a lot of time justifying the market‘s continued rise in my comments, it’s important to note that the same market dynamics can work just as efficiently in the opposite direction to produce sharp sell-offs and volatility.  This may be the greatest challenge our decision-makers will face: how to navigate our way out of the current QE-fueled trap, and back to healthier market dynamics?  

Eventually, market forces always prevail against attempts to control them. Everything has a price, and even if the current trends remain in place for the foreseeable future, sooner or later, the law of unforeseen consequences will cause distortions created in one part of the market to re-emerge somewhere else, the challenge of 2021 and beyond may be to figure out where that might be.

Syl Michelin, CFA®


(1) https://vimeo.com/98550343

(2) https://wholesale.banking.societegenerale.com/en/solutions-services/markets/cross-asset-research/

(3) www.marketintel.stonex.com

(4) https://www.yahoo.com/now/more-ip-os-have-doubled-in-their-debuts-this-year-than-any-year-since-the-tech-bubble-140607697.html

(5) https://www.space.com/37200-read-elon-musk-spacex-mars-colony-plan.html


This piece was part of Walkner Condon’s 2020 Review & 2021 Investment Outlook Guide, a comprehensive interactive PDF covering a wide range of subjects and trends, including the S&P 500, electric cars, and more. To read the full guide, please click the button below.

What is Going on with GameStop?

What is Going on with GameStop?

GameStop, Reddit, Elon Musk, and stocks (or the meme-friendly term ‘stonks’) — all four of those spheres have collided to bring about the latest internet trend, which is just as fascinating as it is perplexing and, for some, alarming.

The GameStop saga also involves hedge funds, including a $2.75 billion bailout of Melvin Capital by a pair of billionaire investors, Steve Cohen and Ken Griffin, and a motley crew of retail investors, some of whom are members of the r/wallstreetbets subreddit, one of a multitude of discussion forums on Reddit.     

All of that build up leads us to the question on everyone’s lips: “What is going on with GameStop?

That was the question addressed on the latest episode of Walkner Condon’s podcast, Gimme Some Truth, as Clint, Keith and Stan try to make some sense of this bizarre sequence of events. They describe what “shorting” a stock is, what a “short squeeze” is, and why the concerted efforts of Redditors have put a short squeeze on GameStop and driven up the price an incredible amount in a short time.

From there, they look back at the (not so) recent history of the market and discuss this in the context of the dot com boom of the late 90s—along with analyzing some of the more nefarious activities of traders and speculators in that era. Finally, the three explain why this trade should likely be avoided (both for financial and legal reasons) and explain the SEC’s reputation and history on cracking down on some of these sorts of market manipulations. 

For those looking for more discourse on this subject, here’s a breakdown of events from CNN, which dives further into some of the more nuanced stock concepts involved. There’s also this New York Times story from 2001, a story referenced on the podcast, about a New Jersey teenager who became the first minor ever to face proceedings for stock market fraud.