IT’S BEEN QUITE A FEW WEEKS since our last update on October 29! The Dow Industrials and the S&P 500 have both reached new highs amidst continuing volatility, with the gains broadening out to many segments of the market beyond technology—a trend that we hope will continue. Apparently, investors are cheering the prospect of light at the end of the tunnel for the pandemic and a government with power divided between Democrats and Republicans. At the same time, our core messages remain intact: that a floor is being built under the economy and the markets, that the headlines will continue to emphasize the negative, and that we’ve been here before: The country has always recovered from difficult times.
Economic Signals Mixed, but Encouraging
We saw the U.S. economy rebound in the third quarter with a record 33.1% annualized growth after inflation, and initial estimates suggest an even stronger number for the Northeast. Overall, we believe that the economy is heading into 2021 with a good head of steam—though 10 million people are still out of work and have probably spent their stimulus checks. Without additional stimulus, which we hope will be coming, we could see a vicious cycle of reduced consumer spending leading to more job losses, which in turn would further depress consumer spending and employment.
In addition, many consumers who kept their jobs may have pulled their spending forward on goods—taking the opportunity now, for example, to buy new cars or renovate their homes, since so many service businesses that would normally be open are not. This may be another factor slowing down near-term growth. But longer-term, the economic picture looks bright to us, as the pandemic—hopefully—fades.
Meanwhile, the economy will move further and further away from manufacturing and toward service industries that rely on highly specialized talents. This is good news for cities like New York and Boston, “knowledge clusters” that attract top-flight professionals. It’s why Amazon and Facebook, for example, have bought or leased enormous amounts of workspace in iconic Midtown-Manhattan buildings.
Divided We Stand
On the political front, while we won’t know until after the January runoffs for Georgia’s two Senate seats, we may well wind up with a Republican Senate and a Democratic House in a Democratic Administration—a configuration, by the way, that we haven’t seen since 1884. But while the mixture is unusual, divided government has been fairly common, and investors have generally liked the checks and balances it affords.
For instance, divided government will probably limit President Biden’s ability to raise taxes to the levels he outlined (though federal and state taxes will almost surely rise to some degree, to cover the budget deficits that have been created). On other key fronts, including liberalizing immigration rules and rejoining global trade agreements, Biden will be more likely to achieve his goals. Altogether, the investment markets may be primed to cheer a hybrid government in D.C.
Will COVID Be Tamed Soon?
We had thought that we’d need to endure another six to eight months of pandemic. Now, with excellent preliminary test results for vaccines developed by both Pfizer and Moderna, we may be nearer to the end of the plague. We may have more vaccines available soon, the products of sophisticated bioengineering, and the capacity to produce billions of individual doses.
At the same time, the pandemic has both created and accelerated pervasive change in the way we conduct our lives, teach our children, and do our jobs. More than 20% of the workforce is now working from home, and Zoom meetings along with Internet shopping and on-line education have become a norm. Even many medical exams are being done remotely. Some of these digital accommodations may disappear once the virus does, but others will continue to define a new normal. We’re not going back to pre-pandemic lifestyles—which presents both a challenge and an opportunity for investors and for all of us.
Make no mistake: COVID is still a daunting problem. The current surge is affecting all regions of the country, and of course, the possibility of vaccines in the near future is cold comfort for patients suffering (and dying) right now. But we have learned much about the virus and treatments for it: Mortality rates are down a lot. So we’re cautiously optimistic that we can get through this latest surge with a much more moderate economic impact than we saw in March—if we get the requisite support from the government.
An Energized Fed
Federal Reserve Chairman Powell has himself called for more fiscal stimulus from Congress, which may indeed be forthcoming early next year. But at this point, the Fed is the only game in town, and has risen to the challenge. It has publicized its commitment to keeping the Fed Funds rate near zero for at least the next three years. The Fed is also making large-scale purchases of Treasury bonds, mortgage debt, and even corporate issues, as it deems necessary. This an unconventional and refreshing agenda.
As to whether the Fed is going too far and abetting a dangerous proliferation of government debt, we don’t think so. Investor demand for safe-haven Treasury bonds seems to outweigh concerns about deficit spending. Still, all of this is the sound of one hand clapping: We need more fiscal stimulus as well.
In this dizzying environment, our advice to investors is to avoid getting seduced by the headlines or the specifics of the moment: Don’t try to outguess the markets. Rather, stay with a disciplined financial plan and keep your focus on the big picture, which is your long-term financial security. Don’t miss the forest for the trees.