Fed Determined to Stay Loose
The Federal Reserve was already holding short-term interest rates near zero. What today's meeting made clear was how determined the Fed is to hold them there for at least the next few years and perhaps well into the current decade.
Positive Policies to Cut the Debt Burden
When government forces businesses to close (even if it is for a pandemic), it's a "taking" in the legal sense. And we can think about $3 trillion in extra federal spending as "just compensation" to businesses and workers for that taking. Basically, we decided to borrow from future generations in an attempt to stop a virus and save the economy.
S&P 500 3650, Dow 32,500
At the end of 2019 we made the same exact forecast for the end of 2020 — the strangest year in our lifetimes, and it's not even over. Compared to most analysts, this was a very bullish call. And then, when the market hit a pre-COVID19 peak of 3386 in mid-February, if anything we looked not bullish enough.
The Housing Revival
The US economy got crushed in the second quarter, with the worst decline in real GDP for any quarter since the Great Depression. However, the long road to recovery has started and, for now, we're penciling in real GDP growth at a 20% annual rate for the third quarter. Of all the parts of the US economy that have weathered the COVID-19 storm, none has been as resilient as the housing market.
Biden's Tax Hike Agenda
Election Day is eleven weeks from tomorrow. In political time, this is an eternity. However, with the White House, about one-third of the Senate, and the entire House of Representatives on the ballot, this election is significant. Particularly because the two presidential candidates have such stark differences in policy perspectives, especially with respect to taxes.
The Bottom Fell Out
Right now, it looks like the US economy shrank at a 35% annual rate in Q2. To put that in perspective, the worst quarter we've ever had since the military wind-down immediately following World War II was -10% in the first quarter of 1958, when, not by coincidence, the US was hit by an Asian flu. This is going to shatter that record by multiples and will likely be the worst since the Great Depression.
There's No Such Thing As A Free Lunch
"There is no such thing as a free lunch." It's been attributed to many different people, Milton Friedman and Robert Heinlein, among others. Regardless of who said it, we think it's one of the most basic economic truths.
The Economy and The Virus
Not since the 1960s and 70s has the United States experienced social upheaval like it is experiencing today. We have protests (both peaceful and otherwise), and a massively divided political landscape. On top of that, we have a virus that is spreading across the country, creating fear and an acceptance of economic shutdowns.
Furloughed or Unemployed?
In the aftermath of recent strong gains in jobs, some analysts have been latching onto pandemic-related classification errors to claim the headline unemployment rate is at best distorted to show an overly optimistic picture of the labor market, and at worst a downright lie to try and manipulate public perceptions.
Not Locking Down
A resurgence of new Coronavirus cases around the country has created uncertainty for investors. Stock markets fell last week, not because of the virus, but because investors fear another round of economy-killing, government-mandated lockdowns. We don't expect that to happen, but when the government is involved, risks are definitely higher.
The Fed is Committed to Low Rates
The one key takeaway from last week's Fed meeting is that monetary policymakers are set to keep short-term interest rates near zero for as far as the eye can see. Not forever, but at least until 2023. Keep this in mind in the week ahead, as we get more reports confirming the economic recovery started back in May.
Signs of Economic Life
This year's experiment with government-imposed lockdowns has been a fiasco. We should have been focused on sealing-off nursing homes and limiting mass indoor events, while the vast majority of businesses that were shutdown could have kept operating, with natural social distancing.
Miscalculating Risk: Confusing Scary With Dangerous
The coronavirus kills, everyone knows it. But this isn't the first deadly virus the world has seen, so what happened? Why did we react the way we did? One answer is that this is the first social media pandemic. News and narratives travel in real-time right into our hands.
How Are We Going To Pay For All This?
The largest federal budget deficit since World War II came back in 2009, as slower growth and increased government spending during the subprime-mortgage financial panic pushed the deficit to 9.8% of GDP. This year's the budget deficit will, quite simply, blow that record out of the water.
S&P 3100, Dow 25750
In December 2018 with the S&P 500 at 2,500, we forecast it would hit 3,100 by the end of 2019 and then pushed our forecast to 3,250 as stocks soared. The S&P 500 rose 28.9% in 2019 and hit that revised target on the first day of trading in 2020.
GDP: Bad, And Getting Worse
Before the Coronavirus, the US economy was cruising for what looked like 3% annualized growth in real GDP in the first quarter. But the effects of both natural social distancing and government-mandated lockdowns crushed economic growth in March.
The Economy, Inflation, and Interest Rates
With each passing week, the economic damage wrought by the Coronavirus and the resulting shutdowns grows larger. It's not just businesses, both small to large, feeling the pain. Educational institutions, hospitals, churches, not-for-profits, and state and local governments are all finding it hard to remain financially viable.
Normally, we're not big fans of enhanced unemployment benefits. But the current severe economic contraction brought about by the Coronavirus and the government-mandated shutdowns of businesses meant to stop the disease is a completely different animal from a normal recession.
Do the Least Harm
Doctors think differently than economists. They put patients with a potential for brain damage in an artificial coma to stop swelling, and when it stops, they bring them out. This fits with the Hippocratic Oath all doctors take, which states "First, do no harm." The idea is to "limit" damage and then "restart" a more normal body with fewer problems.
Cut the Politicians' Pay
The government-mandated shutdown of business, and the massive drop in economic activity it is causing, may actually do more harm to the United States than the coronavirus itself. Early estimates suggest the U.S. economy will contract at a staggering 20% annualized rate in the second quarter, and the number may move even higher.
The Coronavirus Contraction
Due to fears about the Coronavirus – more specifically, the forceful government measures designed to halt its spread, the US is on the front edge of the sharpest decline in economic activity since the Great Depression.
Fed Fires Bazooka at Coronavirus
Back in July 2008, then-Treasury Secretary Hank Paulson said he wanted a "bazooka" to deal with financial threats to Fannie Mae and Freddie Mac. Paulson wanted Congress to give him an unlimited credit line for these enterprises. This time around, it's the Federal Reserve firing a bazooka at the Coronavirus, with more possibly to come.
Reasons to Be Positive About the US Coronavirus Fight
Coverage around the virus has been almost exclusively negative, as experts extrapolate worst case scenarios to spur action. It should come as little surprise then, that fear of a recession has moved to the forefront of many minds. At times like these, we think it's crucial to look at the data and note some positive developments that aren't getting as much media coverage.
A Coronavirus Recession?
No one knows with any real certainty how much, or for how long, the Coronavirus will impact the US economy. What we do know is that it will have an impact. And, after data releases of recent weeks, we also know that the US economy was in very good shape before it hit.
Fed Should Be Decisive
By the time you read this, the Fed may already have cut rates. That is the situation we find ourselves in given the recent correction in equities, which were at a record high only eight trading days ago but were down 12.8% from that peak as of the market close on Friday.
Time to Fear the Coronavirus?
Monday, fear over the Coronavirus finally gripped investors, as both the Dow Jones Industrial Average and the S&P 500 index fell over 3% - the largest daily declines in two years. These drops wiped out all the gains for the year.
Yes, There Was a Housing Bubble, But Not Now
One of the worst bipartisan policy decisions in the past generation was the aggressive government push in the 1990s and 2000s to promote homeownership, beyond what the free market could handle. Policymakers encouraged Fannie Mae and Freddie Mac to gobble up lots of subprime debt, in turn boosting lending to borrowers who couldn't handle their loans.
Jobs, Coronavirus, and the Budget
In January, US payrolls expanded by 225,000, not only beating the consensus forecast, but also forecasts from every single economics group. Since January 2019 (12 months ago), both payrolls and civilian employment – an alternative measure of jobs that includes small-business start-ups – are up 2.1 million.
Look for Steadiness from the Fed
The Federal Reserve is set to make its first policy statement of the year on Wednesday, so this is as good a time as any to reiterate our view that the Fed is likely to keep short-term interest rates steady through 2020 and, while pressures will build, the Fed seems content to hold them steady next year, as well.
Moderate Growth in Q4
Back in mid-November, the highly respected GDP forecasting model from the Atlanta Federal Reserve Bank (also known as "GDP Now"), estimated that real GDP would only grow at a 0.3% annual rate in the fourth quarter, which, if accurate, would have been the slowest growth for any quarter since 2015. At the time, we were forecasting economic growth at a 3.0% rate.
The Gift That Keeps Giving
The US economy is not in an economic boom, but growth has been consistently faster than during the Plow Horse phase from mid-2009 through the end of 2016. Real GDP has grown at a 2.6% annual rate since the start of 2017 versus 2.2% beforehand.
Blame the Overweight Jockey
The longest economic recovery on record continues, with January being the 128th consecutive month of growth. The first seven years, from mid-2009 through 2016 saw average real GDP growth of 2.2%. Since the start of 2017, US real GDP growth accelerated, to an average annual growth rate of 2.6%, while the unemployment rate now stands at the lowest level in 50 years (and is likely headed lower).
Greedy Innkeeper or Generous Capitalist?
The Bible story of the virgin birth is at the center of much of the holiday cheer this time of year. The book of Luke tells us that Mary and Joseph traveled to Bethlehem because Caesar Augustus decreed a census should be taken. Mary gave birth after arriving in Bethlehem and placed baby Jesus in a manger because there was "no room for them in the inn."
S&P 3650, Dow 32500
A year ago, we projected the S&P 500 would hit 3100 at the end of 2019. In spite of the swoon in equities in the fourth quarter of last year, we didn't see a recession coming and our model for estimating fair value for the stock market was screaming BUY.