The second quarter of 2020 was the mother of all economic contractions. Real GDP shrank at a 31.7% annual rate, the largest drop for any quarter since the Great Depression. However, based on the economic reports we’ve seen so far, it looks like the third quarter will be the mother of all economic rebounds. The first thing to recognize is that even if the real GDP growth rate in the third quarter equals or exceeds the percentage drop in the second quarter, the economy is still in a very big hole. It’s harder to grow out of a hole than it is to dig one. The bottom line is that a full economic recovery in the US is still multiple years away.
The surge in growth in the third quarter is largely related to many businesses going from a total lockdown to a new COVID-19 normal. Production and construction six feet apart, no fans in the stands, and 50% occupancy. Meanwhile, many small businesses (and some not so small) have simply disappeared. This suggests that although growth should continue after the third quarter, it’s not going to be nearly as fast. We don’t think we get back to the level of real GDP we saw in late 2019 until late 2021. And that’s really not a full recovery because, in the absence of COVID-19, the economy would have grown 2% or more, per year, in the interim. If we define a “full recovery” as getting back to an unemployment rate at or below 4.0%, we’ll probably have to wait until 2023. The pace of the recovery in 2021-22 will depend not only on the course of COVID-19, as well as development of vaccines, and therapies, but also public policy.
From here, the economic future of the US will be largely dependent on whether Congress passes further stimulus. The $2.2 trillion CARES Act kept people and companies afloat during the early days of Covid and now those benefits are waning. We’re seeing pickups in layoffs and furloughs at many companies in the travel and leisure space, including theme parks, airlines, hospitality and sports.
It’s going to be a long slog back. (sources: First Trust, Nottingham Advisors)
From an investment perspective, we are likely to see increased volatility going forward. That would have been true due to Covid-19, lack of action in Washington, and the upcoming election. It just increased with reports that the President has tested positive for the virus.
Having said that, the financial markets (basis S&P 500) have weathered a number of turbulent events since the Great Financial Crisis of 2008-2009, as the chart below shows. More importantly, notice that despite these events and the pullbacks they created, the trend has continued to be consistently upward. I anticipate that this trend will continue to be the case going forward.
Right now the stock market is stuck between analytical and behavioral factors. The analytical side is seeing a slowing economic recovery and no fiscal help from Washington. The behavioral side is following the Federal Reserve’s money printing and buying all the dips. This has left the S&P500 range bound between 3,200 and 3,400. The news about the President’s health probably increases the risk to the downside until we see how his diagnosis proceeds.
Therefore our approach is to remain cautious near-term but opportunistic to take advantage of pullbacks to get into high quality investments at lower prices. Having a plan for you allows us to focus on staying on track and not get caught up in market gyrations. As Mark Twain said “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”
October Calendar of Events (comments and additions for future months are always welcome)
- October is Breast Cancer Awareness and Domestic Violence Awareness month.
October 7th 4th anniversary of purchasing our office building – we’d love to have you come for a visit – 141 W Main Street Rockaway
October 12th Columbus Day
October 15th Medicare open enrollment thru December 7th – you can switch from original Medicare to Medicare Advantage, or vice versa. You can also switch from one Medicare Advantage plan to another, or from one Medicare Part D (prescription drug) plan to another, or drop your Medicare Part D coverage altogether. Please call us if you have any questions about your options.
October 24th National Food Day – I’m a definite “foodie” person, how about you?
October 31st Halloween
Sources: First Trust, Nottingham Advisors, JP Morgan