Are we really recovering?
I just returned from 5 weeks at my family cabin in Highlands, NC. It was a great time of rest in my favorite town. Fortunately, I was also able to “work from home” while I was there.
Despite my efforts to escape, we’re still in the middle of a global pandemic. A large portion of our economy is still closed and we’re in a global recession. We have the worst civil unrest since 1968, we’re 3 months away from what is likely to be the most contentious Presidential election in history, we have the lowest interest rates in history, we’ve added $3 trillion to our debt (with another 3 coming) and we’re increasingly be at odds with our greatest adversary - China.
But the market, as represented by the S&P 500 is only 3% away from an all-time high!
I know this is cliché, but if you had told me last August that a year later we would be where we are, I would have told you…well you can probably guess what I would have said.
Our economy in the U.S. just shrank in the 2nd quarter by about 8% in real terms. Many analysts, like Goldman Sachs for example, were predicting this type of massive reduction. They are now forecasting a 6% increase for the 3rd quarter. This would be the largest single quarter increase in GDP (Gross Domestic Product) ever.
But, will this hold true? Answer - it better.
We know the market tends to look 6 – 18 months ahead and If it’s right, the economy will recover much sooner than some may believe. Right now, though, there’s no doubt the market has decoupled from the current economic reality and is betting the government will continue to provide the massive stimulus necessary to keep things afloat until we have a vaccine.
However, there may be a limit to how long the money printing can go on. Normally, when individuals and corporations experience financial difficulties, there is usually a progression of things that happen. They usually spend down their cash reserves first. Once that’s gone, they turn to credit. Then, when the creditors are no longer willing to lend, they begin to sell assets. How long it will be before we as a nation get to this point, I don’t know. Which asset do we sell first? California, New York? Alaska?
While there is usually a limit to how much any individual and corporation can borrow to stay afloat, there are academics who believe we can borrow indefinitely because we can simply print more money to cover our debt payments. Keep in mind, Congress is already struggling to pass the second round.
The market is also starting to predict inflation. Back in 2008, there were many people, including me, who believed the Federal Reserve’s actions would lead to inflation. It didn’t. This time however, I believe it will. The money flooding the economy is going into the hands of people who will spend it, creating a higher “velocity” of money. We’re already seeing the signs of this with the price of gold soaring and the value of the dollar plummeting. We’ll see if that plays out over the long term.
Lastly, my heart goes out to those of you who are struggling because of pandemic. Unfortunately, “30 days to flatten the curve” turned into 175+ (with more on the horizon). I know for many it’s a tough and uncertain time. Even though there are future risks, I believe the government did the right thing by helping folks who needed it. But to truly recover, we must get to the point where we can live with the virus (with or without a vaccine) so the nation and the world can get back to work.
Michael P Henderson, CFP® CKA®
CERTIFIED FINANCIAL PLANNER™
The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Crossover Point Advisors, an SEC Registered Investment Advisor and separate entity from LPL Financial.