In 2019, we had low unemployment and low interest rates. The stock market was hitting new highs on a regular basis. In the past year, our economy, as well as everyday life, changed drastically. What has happened in the markets in the past year was nothing short of remarkable. View our 2020 Annual Economic Update webinar to hear our reflections on 2020, predictions for 2021, and market sectors to watch.
Summary of 2020 Annual Economic Update Webinar
Many parts of the economy continue to display fundamental economic strength. In the third quarter, the S&P 500 earnings declined about 6.3% year over year. The shortfall of about $14 billion came from the energy sector, which was hit hard by the pandemic. Another $13 billion in losses came from the airlines, and $9.7 billion came from hotels and restaurants. Excluding those three hardest-hit industries, third-quarter earnings growth across the S&P 500 would have been over 4%. 2020’s fourth-quarter earnings so far are coming in strong, which leads us to be very optimistic about future returns for equities.
The market discounted the post-election turmoil and is really homed in on COVID-19 vaccines. Future returns in the market are going to depend on the uptake and effectiveness of the vaccines. If vaccine production can continue at its current rate and vaccines are widely adopted, then the market should be relatively happy. Unemployment continues to trend downward, and voluntary employment separations have rebounded to their 2019 pace. Industrial production has also recovered much more quickly than in prior recessions, and the U.S. is looking particularly strong compared to some other countries.
Inflation and bubbles
All the data shows that the Federal Reserve has not inflated an economic bubble thus far. While the Federal Reserve acted swiftly and strongly this past spring, its summer and fall 2020 actions were not inflationary. The Paycheck Protection Program (PPP) was also far more effective than many originally believed, allowing U.S. bank lending to grow in 2020.
Market-based indicators of inflation remain muted, with no data showing that there’s a large inflationary bubble coming. Indicators do show a possible return of inflation in upcoming months. An inflation rate of about 2% will make headlines, but it’s important to keep in mind this is a comparison to last year when inflation was negative. The takeaway here is to really understand that data and avoid making investment decisions based on headlines.
Although interest rates aren’t negative or zero anymore, the 10-year treasury is about 1%. It’s an excellent time for those looking to purchase a new home or refinance with a 30-year mortgage.
Long-term Economic Impact
Economic rebound is likely to be moderate after several more months of rapid recovery. Prior to the pandemic-induced recession, economic growth was trending above expectations, and we expect growth to resume tracking along the trend line of the prior decade. The U.S. economy did decline in 2020, but only by 0.9%. In light of what our country experienced in 2020, this is excellent. The U.S. (and global economy) saw a decrease in spending on transportation and travel, but there were also significant increases in spending elsewhere, such as hobbies and electronics.
Since last February, Americans added about $2 trillion in savings deposits—not necessarily by choice, but perhaps due to lack of spending opportunity. Consumer spending expectations are continuing to rise, and Americans are projected to spend more this year than they did last year, which will be wonderful for the economy and local communities.
What do the 2020 election results mean for investors?
The markets largely ignored the election turmoil, as well as all of the events in the Capitol on the day the electoral votes were counted. The markets are now looking down the road and pricing in policy changes that could be put into place for the long-term.
Beware of conventional wisdom related to investing based on which political party is in power. History has shown us that the sectors one would expect to do well under a Democratic administration have actually underperformed in the past. We would advise investors to not make any large changes to your portfolio simply based on the outcome of the election.
Climate and energy regulation is increasing as expected. We’ve already seen holds on leases on federal lands. Ultimately, these regulations will increase energy costs, resulting in a good option for investors in energy stocks. Slightly higher energy prices will be beneficial for large-cap energy companies; at the same time, significant price increases in energy could also slow the economy.
Ultimately, the economy does well because of the consumer, not because of who’s sitting in the White House. We encourage you to be an investor, not a trader. Look at the solid companies for the long haul and stick to your plan despite politics. Protect your savings, look at your cash flow, and reevaluate your budgeting and emergency funds. Review your overall financial plan, ensuring your activities today are helping achieve your goals moving forward. Consult with your financial advisor to ensure you are taking advantage of the changing tax laws and taking proactive steps to ensure financial success down the road.
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