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By David RichmanNational Director, Eaton Vance Advisor Institute

Please reflect on these two classic quotes attributed to American financier Bernard Baruch:

  • "What everyone knows isn't worth knowing."
  • "Millions saw the apple fall; Newton was the only one who asked why."

  • Upon the outbreak of the pandemic in the U.S. almost a year ago, we turned to Bill Hackney, a retired senior partner of Atlanta Capital, for his sage counsel. At such a critical time, it was an honor of mine to have Bill use me as a sounding board for his April 12, 2020 newsletter, "Journey to the next new normal," in which he created an investor's framework for analyzing the pandemic. Having moved past the "panic" (February-April 2020) and "transition' (May-December 2020) phases, we are now in the early stage of the "new normal" (2021) phase.

    Taking the inquisitive approach of Sir Isaac Newton, our conversations explored "what everyone knows" as we challenge some conventional wisdom regarding domestic equity outlooks and tease out some intriguing Hackney theses. Investment theses are timely, pithy sound bites that connect the dots to the strategies you have embraced with your clients.

    Below are excerpts from my recent interviews with Bill with his current theses in bold.

    David: "Bill, in your article last spring, you were prophetic in your prediction that by January 2021 we would have a vaccine developed. You also projected that this would usher in the start of an economic recovery, improving earnings, rising interest rates and inflation, narrowing credit spreads and a less accommodative Fed. Let's zero in on your last point. Conventional wisdom seems to believe that 'easy money' will remain easy. Do you stand by your forecast from last spring? What if 'what everyone knows' is wrong?"

    Bill: "I do stand by that prediction today. As 2021 proceeds, inflation and interest rates are likely to surprise on the upside, particularly because of the massive amounts of new stimulus proposed by the Biden administration. The U.S. economy entered this year with a lot of positive momentum from the manufacturing sector. Unlike most recessions, the recession of 2020 saw an actual rise in consumer savings and consumer disposable income. The upshot of all this? As the economy gains strength in 2021 with the rollout of vaccines, inflation pressures will reemerge later this year and if the Fed does not begin to tighten monetary policy, there is a good chance that the 'bond vigilantes' will do it for them. In other words, longer-term interest rates will spike because of investor concern about inflation and Fed policy being 'too easy'."

    David: "Turning to more conventional wisdom, Bill, 'everybody knows' the change from a Trump administration will have a big impact on the economy in 2021. Your thoughts?"

    Bill: "In my view it is extremely unlikely that the change in administration will have a significant impact on GDP growth, employment, wage growth and inflation this year. Major economic trends for 2021 are already baked in the cake. The major economic impact from the recent change in administrations will come in 2022 and beyond."

    David: "Conventional wisdom seems to be that additional stimulus is critical to improving economic growth. Your thoughts?"

    Bill: "Again, I am on the other side of conventional thinking here. Another massive fiscal stimulus program in early 2021 will not accelerate the pace of growth in economic output or jobs very much. Consumers will use much of the additional stimulus money to pay down debt or increase their savings. The extra money will inflate asset prices not output and jobs.

    David: "If the market is an indication of conventional wisdom, it would seem 'everyone knows' the economy will be in recovery throughout 2021 and the stock market will continue to rise. Is this a good time to consider your ism — the stock market is not the economy?

    Bill: "Absolutely David. The economy will show a big improvement this year while capital market performance will be lackluster. This is where all of these challenges we have been discussing of 'what everyone knows' are likely to coalesce and add considerable risk for a market surprise sometime in 2021. Equity valuations are stretched and there are a number of indicators flashing yellow — M2 growth, rising copper and precious metal prices, a weaker dollar and even record-high bitcoin prices. A bad inflation read in the months ahead will likely be the catalyst for a decline in equity valuations."

    "It's important for investors to realize that much of the stock market's richest valuations are concentrated in relatively few large technology and internet-related companies. These companies have led the stock market for the last few years and attracted the most investor attention. As a result, there is still an abundance of solid, often overlooked, investment opportunities outside these 'privileged few' large-capitalization technology stocks. Generally, they are smaller-capitalization, higher-quality companies selling at 20 times earnings or less."

    "For both the stock and bond markets, what worked best last year is unlikely to work best this year. Remember the Bible verse from Matthew 20:12: 'So the last will be first, and the first will be last'."

    Bottom line: As you solidify your investment theses for 2021, consider taking a page out of Bill Hackney's playbook and challenge "what everybody knows."

    All investing involves risk including the risk of loss.

    At the Advisor Institute, our goal is not to shape your opinion or provide investment advice, rather to share this viewpoint as an example of what we believe to be a superb display of thesis articulation.