Economic Monitor: And the Beat Goes On...

BY: Mark Drachenberg

The election is finally over (we think)! We survived! And while I promise to (mostly) attempt to steer clear of politics here, the results of the election do have consequences for the markets and the economy. It appears that the government will remain divided, which will likely mean fewer surprises when it comes to policy. So, the 2020 beat goes on…now to vanquish the virus and get back to normal – new or not!

October was a mixed bag in terms of market performance. The main equity indexes extended September’s slide, with the S&P 500, DJIA, and NASDAQ all falling, while small- and mid-cap stocks recovered a bit. Even bonds gave back some ground in October, as the Barclays Capital U.S. Aggregate Bond Index fell slightly. The good news is, the S&P 500, NASDAQ, and US Agg are still positive for the year. The markets are rallying, and we certainly hope that trend continues.

The economy recovered some more ground in the third quarter, with GDP rising a whopping 33.1%! Though still down 2.9% over the past year, considering where we came from, this is great news. The key, however, is determining what drove the recovery, as that will provide insight into the economy’s true strength. Federal government spending, in the past year, accounted for 31.2% of GDP, with non-defense spending approximately 40% higher than its previous peak in 2009. Some of that went toward measures to aid the fight against the virus (e.g., masks, ventilators), but most was support for small businesses (e.g., PPP loan program) and workers. The budget deficit has ballooned to over $3 trillion and may grow further, which is unsustainable. One partial solution is for the federal government to issue bonds with long-term maturities, which would help lower the interest burden down the road. (A rough analogy would be someone refinancing their mortgage as rates fall – and, by the way, I encourage you to explore your options on that front, as you may be surprised by how much you can save). All this debt helps to fuel our economy in the short run, but does have long-term implications.

On the whole, the economic recovery is somewhat unsteady, and the strength of the rebound would quickly be mitigated should another lockdown occur. While growth will slow over coming quarters, things should return to where they were a year ago by sometime in 2022, if all continues to go well. Not locking down the economy, not increasing regulations, not increasing taxes, providing some stimulus (perhaps infrastructure spending and more small business help) are all factors that would aid in furthering growth and recovery.

The markets love certainty and hate uncertainty. As the makeup of the federal government comes into focus moving forward, there should be more certainty than less, which will give the market confidence to continue to move higher. The virus still has a role to play as well. While the numbers have been higher recently, and could go higher still as we move into winter, the death rate has remained steady since July, at just below 2% of cases. When a vaccine becomes available, we should see a boost to the economy, and a somewhat shorter boost to the markets, which have already priced some sort of virus recovery in. (Full disclosure: This article was written before yesterday’s news of a potentially game-changing vaccine from Pfizer broke.)

As we move toward the holidays and New (hopefully, better) Year, we will continue to analyze the economy recovery, the effects of the virus on the markets, and the to-be-determined impact of the election results. However, our approach has not changed, and will not, as we continue to seek out opportunities that provide a balance between protecting the downside and capitalizing on growth opportunities. Please call the Wealth Management department of the State Bank of Cross Plains at 608.826.3570, or reach out to me personally, to discuss your portfolio or any other issue you may have. We look forward to speaking with you.

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