As I write about investment markets and economy of the first half of 2020, my mind drifts to a historical event of 82 years ago. The inspirational horse race between Man o’ War and Sea Biscuit caused people to forget about a coming World War, the Great Depression and vast cultural differences.
I wish we had such a distraction from Covid-19 resurging, 12% unemployment and partisan race and culture issues. Pimlico race track accommodated 15,000, and the race was held on a Tuesday to attract fewer people. More than 40,000 packed the track, and an entire nation, including FDR, was glued to radios.
Little did the country know that America was about to begin an unbelievable climb out of a bear market to become the world’s economic and military leader. It was impossible to see the incredible forthcoming 82 years.
Today’s outlook, too, is split. The virus, election uncertainty and multiple economic challenge concerns prevail. Equally powerful is the positive reality of new highs in the stock market, technology breakthroughs, the greatest infusion of stimulus liquidity in history and a notable drop in unemployment. It’s essential for long-term investors to look beyond 2020, worry less about the value of the stock market next month and consider how investors will fare over the coming decade.
The first half of 2020 saw one the worst quarters in U.S. stock market history followed by one of the best. If anyone doubted timing markets was almost impossible, we can rest our case. Weekly double-digit swings became the norm. Now, we are nearly back at the starting point; the decision to let asset diversification work is on target.
The first quarter saw a 6.8% decline in GDP, and the consensus predicts a 30-40% drop in the second quarter. That meets the definition of a recession. Decline is led by a 50% drop in consumer spending and a sharp fall in business spending. Exports are down 35%, while profits for 2020 could be slightly negative – even with an expected recovery onset.
It requires substantial stimulus to offset this level of economic slowdown. Fortunately, we received it: $2 trillion from Congress coupled with a Federal Reserve promise to provide “whatever is needed.” A reminder, “Don’t fight the Fed,” is fitting.
Government and Fed dollars pumped into the economy are pure liquidity equal to the loss of activity. Banks are strong in capital. The threat of a depression-like event is off the table. However, a significant dip, driven by virus resurgence, would not be a surprise.
February closed strong with record low unemployment and solid profits. Nothing in the current crisis derails America’s technological transformation in semiconductor chips and artificial intelligence. A bonus is the “stay at home” reliance on cloud computing and network applications. Media, home shopping, home cooking and telemedicine are ahead by years, and the explosive stock prices indicate things will never be the same in some good ways.
The market surmises electric self-driving cars are coming sooner, while biotech re-emerged as a strong growth sector. The stock market generally discounts four to six months into the future, but with near zero interest rates and the expectation of Fed backing, that window is comfortable into 2021 even if we take a step back.
Yes, we have trade disputes, partisan bickering and an unsettling election, which can cause roller coaster moves, but not secular economic damage. By election time, the expected result will reflect in stock prices. It will be too late to time impact. More important, powerful forces of near zero interest rates and a secular growth in key American sectors should offset temporary tax rate or progressive policy concerns. Government spending and infrastructure programs are likely regardless of the election. Evidence from other countries indicates that once we experience flattening of the virus, people return to a full range of activities. China is experiencing positive recoveries in key parts of its economy. Other Asian nations have solidly recovered. Europe is back to 8% unemployment. The U.S. might lag now, but our growth sectors are more powerful.
Retired investors are facing positive forces. Worldwide, aging populations are holding inflation to historically low levels. Home prices are rising and boosting wealth. Advances make activities from healthcare to home shopping more accessible. Therefore, investment returns (even if bonds offer lower than historic returns) are putting real purchasing power into financial plans. The level of Fed spending isn’t likely to cause a surge in inflation or a decline in the dollar for three reasons.
First, our spending is relative to other central banks and governments that have had peak levels. Second, worldwide demand for yield is extremely strong; $17 trillion in global savings have negative rates. Our bonds look attractive. Finally, when global situations are shaky, the U.S. is the world’s comfort haven. Bond investors aren’t likely to decide Chinese bonds are better. Since 2009, the stock market is up 241%, well below cumulative gains of previous financial crises recoveries.
Until earnings recover, measures of stock values will be distorted and appear high, because the market is very bullish on 2021 and beyond. As those listening to the 1938 horse race, we may not imagine this strange time initiates strong advances in market returns, the quality of life and American leadership. Yet, this is what markets tell us.