This year we have all had ring-side seats to the battle of the economic effects of the virus-related lockdown vs the economic effects of the stimulus from the Fed and Congress (and the rest of the world). The first few rounds went to the virus, the latest few rounds went to the stimulus…so far it seems like a draw. But we will all be watching how it plays out.
In the same vein, the “gamblers” are watching this closely. The stock market seems to think the stimulus can last long enough to get a vaccine in place (evidenced by the rally of the second quarter); the bond market seems to think it will not happen before we get another economic downturn (evidenced by the super low interest rates).
In addition to the ongoing virus issues—including still rising cases in the US, we have civil unrest not seen since the 1960s, simmering tension between the US and China, the US withdrawal from the WHO, and uncertainty around the election. These factors will play a part in how this bout finishes.
The Next Stimulus
Key to the outcome of this battle will be the next stimulus. The EU just agreed to another stimulus plan. If Congress cannot come to some agreement on another plan, including extending the extra unemployment benefits that are set to expire in a few days, that would likely stall the recovery. The unemployment rate is 11.1%, but due to the way the survey is conducted, one must answer that one does not have a job AND is actively looking for a job to be included. All those folks who are not actually looking for work do not count in the official statistics—so the number would be a lot higher once people have to start looking again instead of being able to wait for a job to come back to them. The flip side of that is the number of employers who are trying to hire workers but cannot because they are “making” too much money from unemployment. A balance needs to be found. Also of importance is the current moratorium on foreclosures and evictions, if that is not extended things could get uglier. But if these programs and further SBA or PPP help arrives the battle will swing in the favor of the positive effects of the stimulus.
The Election
Granted, it is still four months away and Mr. Biden still has not picked a running mate, nor has there been one minute of debate between the candidates. However, President Trump is trailing badly in the polls and at the current time it would appear that not only is he likely to lose the election, but the GOP is likely to lose the Senate. This is a major reversal from how things looked in January, and even before the virus hit in earnest in March. In January the betting odds were showing the Presidential election was a tossup and Senate control had a 70% chance of being retained by the Republicans. That number in both cases is now about 65% in favor of Mr. Biden and the Democrats.
Admittedly, the mistake everyone made four years ago was underestimating the number of people who will vote for Mr. Trump but not admit it, thereby throwing the polls out of whack. However, in 2016 he was trailing by 3-5 points, and it is more like 10-12 now. He is also trailing in a number of the battleground states, and in some of the states he easily won in 2016 it is more like 50/50. So there is a lot of work to be done if he is to turn this around.
Given the data, it is worth beginning a discussion on what happens if the Dems sweep (the control of the House has always been widely seen as a Democratic victory). The Biden tax plan has been published; it calls for higher corporate taxes, higher income taxes, loss of advantaged capital gain rates, loss of the at death step up, etc. The bottom line, more programs aimed directly at the lower income folks and less for the upper income folks.
The Future
What happens after the bout ends? Most likely another bout, this one between inflationary forces and deflationary ones. Until a vaccine comes along, is widely distributed, and assuming it is mostly effective, deflation will be ahead in the game because there is too little demand with too many folks unemployed. However, once the vaccine is in place, all this massive stimulus will be ready to explode into the economy. Plus, the Fed will keep interest rates near zero, probably until unemployment drops well into the single digits, and the dollar is expected to continue weakening. We are seeing some signs of it already though in food prices, and restaurant prices (for those brave enough to venture out to eat). One question is how many of the jobs that have been lost are going to end up being permanent. If it is 10-15% (instead of something like 5%) that will slow the inflationary effects. Furthermore, deflation will not go away completely. Unlike the 1970s, this country was growing at a much slower rate with greater spare capacity before the crisis started, and our energy reliance on imports was almost the opposite of today. Finally, the aging population and massive debt loads will put the breaks on spending for a while. It will be an interesting battle.
Keep an eye out for that next stimulus package for the early indication of how the next couple rounds of the virus/stimulus fight goes. Please reach out to Jim or me with questions about how these various factors relate to your planning needs or your investment needs.
All of us hope that you and all of yours are staying healthy, both physically and mentally.
