Good Recovery So Far, But Still a Long Way to Go

Recap of People’s United Advisors Market Update Call: October 29, 2020

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KEY TAKE-AWAYS

  • The 33% estimate of third-quarter real-GDP annualized growth is a banner number, but it doesn’t bring us back to pre-pandemic levels.
  • While some sectors and their employees are doing very well in the recovering economy, others are having a rough time; the recovery has been selective and is nowhere near complete.
  • The service industries have been especially hard-hit, and particularly for them, more government stimulus will be a necessity for recovery.
  • We have confidence in a long-term recovery as knowledge and talent become even more important in driving growth.
  • We see our job as building portfolios that take advantage of long-term economic change, not trying to second-guess what a specific Administration in D.C. may or may not favor.

WHAT A ROLLER COASTER YEAR it’s been! Yet, in the broadest sense, our view of the landscape remains as it was seven months ago: that a floor is being built under the economy, that the headlines will generally remain bad rather than good, and that the country has dug itself out of hard times before. Nevertheless, much has changed over the last several months.

Some Big Recovery Numbers
From one perspective, the news is becoming brighter. Despite the new surge in COVID cases here and in Europe, we’ve become more effective in treating the illness, and we expect a vaccine to become widely available next year. And though it doesn’t feel that way, the economy has been recovering since May. Half of the 22 million jobs lost in March and April—an enormous number—have been recovered (which still leaves a sobering 11 million jobs to go), personal consumption is up 40%, and retail spending is above pre-pandemic levels if you remove food services from the equation.

Most important, the first estimate of real GDP growth in the third quarter of this year came in at an eye-popping 33.1% annualized (the way GDP numbers are reported, with the unrealistic assumption that GDP will grow at that rate for four quarters in a row). That 33% growth was the fastest posted since World War II—by a long shot. The next-best quarterly growth rate, which occurred in 1950, was 16.7%.

The Best of Times, the Worst of Times
And so are we in a “V-shaped” recovery, quick and thorough? We don’t think so—because the picture is mixed. For one thing, the 33% growth isn’t enough to make up for the huge second-quarter plunge. And while the stock market was ebullient for much of the time after March, its gains were mostly confined to tech-related companies. We’d like to see a broader-based market recovery that would include, for example, economically-sensitive cyclical stocks.

In addition, while things have been very good for some industries and sectors of the economy, and the people who work in them, it’s been tough sledding for others, including industries in the key service sectors, like hotels and hospitality companies. In our view, the economic recovery still has a way to go.

Yet, for companies able to take advantage of the digitization of America, it’s been a bonanza. The FAANG stocks--Facebook, Amazon, Apple, Netflix, and Google (Alphabet)—have been cleaning up in the market. And in some cases, their companies have been buying up America: Amazon bought the iconic Lord & Taylor department-store building in Manhattan, for instance, and is preparing to put 2,000 people in that space. Facebook is taking every square foot of the 730,000 in New York’s old main Post Office, and will fill it with 15,000 employees.

More Stimulus Will Be Key
For companies that haven’t been as lucky, additional stimulus from the government will be necessary. Given the political climate in Washington and the upcoming election, will that stimulus be forthcoming? We think so, though we can’t say exactly when, what the package will include, and how big it will be. The market is discounting $1 trillion of support; if there’s more in the offing, that would be a larger near-term boost for the economy—perhaps to growth levels above its natural trajectory, though that remains to be seen.

For the stimulus to be effective, we believe that it will need to focus on job growth, especially in the weakened service industries. Normally, it’s manufacturing that suffers most in a recession and service industries that fare better; this time, it’s the opposite.

The Shape of a “Purple” Economy
Once a comprehensive recovery is under way, what will the future economy look like? We think there are hints about that. We see a more efficient economy, which is to say, more flexible. The work-from-home, buy-on-line trends may not be as strong once the pandemic passes, but they’re not going away. Just as “purple” states politically have both Democratic and Republican features, we think that the economy to come will be a hybrid between tradition and change.

We think that the hallmark of a “purple” economy will be that it’s knowledge-based. And we’re confident that the country has the talent to meet the challenge. In fact, since a knowledge-based economy depends on “knowledge clusters”—places where brainpower is available in quantity—we’re particularly optimistic about the Northeast. Think New York City and Boston, for example.

Both cities and their environs possess the four characteristics we see as indispensable for a knowledge cluster: human capital (smart people, and not just in universities); investment capital (including access to private equity and venture funding); spending on Research & Development (which induces the government and private organizations to award grants for more R&D); and educational institutions. Ultimately, the most important asset will be talented people—which has always been the case.

As for the Election…
Elections have consequences, as we all know. But in helping our clients with their investments, we think it’s a mistake to try to figure out the “best portfolio” for a Biden win or a Trump win, or for the various possible Congressional/White House permutations. Rather, our goal is to build a holistic “country” portfolio geared to do well in any political environment. That means a portfolio of high-quality companies from diverse sectors with good growth prospects for not only their earnings but their revenues. In that way, we remain focused on the long term and the big picture.

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