Volume 91 No. 12 - December 2020
As we prepare to enter a new year, we also appear poised to emerge from the generational event that the COVID-19 pandemic has become. All indications point to the delivery of a vaccine later this month. With election uncertainty fading behind us, market volatility has begun to subside.
A few days before Thanksgiving, the Dow Jones Industrial Average closed above the 30,000-point mark for the first time ever. Even though we still face the spiraling growth of daily COVID infection counts and tightening space in some US hospitals, there’s a light at the end of this tunnel.
The Long Night of the Pandemic
Beyond its very real human and social costs, the pandemic has also brought considerable economic challenges for the coming Biden Administration. The Organisation for Economic Co-operation and Development (OECD) predicts that global GDP will shrink between 6% and 7.5% in 2020, its largest drop since the founding of the OECD 60 years ago.
Closer to home, despite the record 33.1% annual growth rate the US economy posted last quarter, we still faced historic economic contraction earlier in 2020. We also must confront the realities that a second wave of coronavirus infections has brought to many parts of the country.
Despite the remaining economic uncertainties and rising COVID case counts, ICI has long-term confidence in the US economy and its ability to recover and move on, but the next three to twelve months are murky.
The Clouds Have (Mostly) Cleared
The GSA’s recognition of President-Elect Biden’s apparent win in the 2020 presidential election appears to have resolved much of the political uncertainty we have faced this fall. Two January elections remain for senate seats in Georgia that will determine control of the US Senate. However, it appears that the Republicans will likely keep their majority.
This may mean political gridlock in the short-term, but also a sigh of relief from those who have been worrying that the political extremes in our country may tug national policy to the far right or the far left. This likely means calmer waters for many of us, and much lower ratings for our national media outlets.
This means that we, as a people, can now set our sights on coming out of the pandemic.
That Problem of the Debt
We also must face the aftereffects of the financial stimulus package of 2020. Valued at $2.2 trillion, the CARES Act became the largest economic stimulus package of our country’s history. The CARES Act more than doubled the size of the 2009 Recovery Act that followed the Great Recession.
Our country will need to pay back the costs of that stimulus package. That repayment will come in some combination of three ways:
· Inflation
· Higher taxes
· Reductions in benefits
While the spending generated by the CARES Act will likely lead to inflationary pressures, the rest of the picture regarding its repayment remains far murkier. We simply do not know whether the costs of the CARES Act will be repaid with higher taxes, reduced benefits or some combination of the two. Today, Congress continues to debate an additional stimulus package which could add to the debt.
The Disconnect Between Wall Street and Main Street
Beyond the political, social, and geographical divisions that define our society, economically, it’s the disconnect between Wall Street and Main Street that has defined our financial year. Amidst the economic pain created by the pandemic, the financial markets and many investment portfolios have performed unexpectedly well.
The drivers behind this reality are subject to debate. General consensus indicates that the stock market’s growth amid the costs of the pandemic has come from a few factors, including the liquidity injected into the economy earlier this year by the Fed and speculation from investors looking to capitalize on changes that the pandemic will bring to society. Investors’ fear of missing out (FOMO) may have also played a role in the stock market’s early recovery.
The economic pain coming from the pandemic and its aftereffects have been felt more keenly by the smaller shops that line Main Street than the large-cap companies that form the basis of our client portfolios.
Year to date, the Dow Jones Industrial Average has grown by 4.5% while the S&P 500 and the NASDAQ have grown by 12% and 33%, respectively. The disconnect between Wall Street and Main Street has never been more stark.
Facing 2021 and Beyond
Near-term, we still face volatility and the short-term economic pain that the COVID pandemic has brought us. The number of Americans filing first-time claims for unemployment still increases many weeks. This indicates that, in the short-term at least, the US will still face economic challenges to its labor market recovery as COVID cases surge around the country.
Despite the uncertainty of these next few months, however, we have long-term confidence that the US economy will recover and prosper as we leave 2020 and the pandemic behind.
Investment Counsel is here to help. We can help you analyze your investment strategy and your current holdings as we prepare to enter the new normal of the post-COVID era and the coming Biden Administration. While storms still lurk on the horizon, we believe in the value of long-term, diversified investment strategies that remain agile to changes in market and social trends.
Patience and reason have served us well in our ninety-one years since our founding in 1929. We’re certain that they will continue to serve us well in the future.
Investment Counsel Inc. is a registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.