The Greatest Possible Stimulus
After receiving the genetic sequence of the novel coronavirus from China, it took Moderna just two days (two days!!) to generate the sequence of the vaccine. In less than a month, they produced the first clinical batch of the mRNA-1273 vaccine that has now seen tens of millions of doses distributed.
Overstimulation on the Way
Things are looking up for the US economy. Later this week we'll get an update on real GDP growth for the 4th quarter of 2020. We estimate that'll be revised up to a 4.3% annual rate of growth from a prior estimate of 4.0%.
It's Not a Bubble
Ever since the stock market bottomed in 2009 during the financial crisis, people have been coming up with reasons why the bull market was about to end. We heard every reason – Brexit, the end of Quantitative Easing, too much debt, COVID, etc. – and while we understood each may be a cause for consternation, we focused on valuations, which suggested the bull market would continue. Over time, math wins.
Immunity is Closer Than You Think
While the US has been a focus for criticism throughout the COVID-19 pandemic, its vaccine rollout has so far been the envy of the world. Since Operation Warp Speed eliminated many of the bureaucratic hurdles to FDA approval and helped deliver a vaccine in record time, the US has been steadily growing its distribution system.
The Return of Inflation
Inflation is not dead. It is not gone. It has not been tamed. We know it seems like it, especially after the past few decades which generated in many an "inflation-complacency" that feels justified. After all, following the 2008 Financial Panic, many predicted Quantitative Easing would cause hyper-inflation.
AOC and Ted Cruz, Agree!
Yes, 2021 is starting off as crazy as 2020. They don't agree on the Green New Deal, or Socialism, but Ted Cruz and AOC both agree that limiting investor access to markets is a mistake. In case you missed it, last week, Robinhood, a new online trading platform that marketed itself as democratizing investment, stopped investors from buying certain stocks.
Watching and Waiting
Beyond the annual rotation of voting members on the Federal Open Markets Committee (FOMC), there wasn't change in today's Fed statement. While acknowledging the moderation in some recent economic data, and that weakness is concentrated in areas most directly impacted by the pandemic...
Can Massive Deficits Really Be Financed?
The budget deficit for fiscal year 2020, which ended 9/30/2020, was $3.1 trillion, the highest ever on record in dollar terms, and the highest relative to GDP since World War II. This year the deficit will be even larger.
Keeping Good State Policies
When it comes to attracting people, jobs, and businesses, some states are just better than others. While the total US population increased 6.5% from 2010 to 2020, it increased 17.1% in Utah, 16.3% in Texas, 16.3% in Idaho, 16.1% in Nevada, 15.8% in Arizona, and 15.3% in Florida.
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."
2021: Robust Growth, Higher Inflation
The COVID-19 Recession is the weirdest we've ever had. There is no way anyone could have forecast it. It did not happen because the Fed was too tight. It did not happen because of a trade war. It was self-inflicted, caused by COVID shutdowns.
Mnuchin, Powell and the Georgia Elections
Who's in charge of fiscal policy? That's the real issue behind the recent dispute between Treasury Secretary Steve Mnuchin and Federal Reserve Chairman Jerome Powell regarding the Treasury's decision to end certain emergency lending facilities by December 31, 2020.
Giving Thanks, Double Dip Unlikely
Give Thanks! The US economy continues to heal. Payrolls keep growing, unemployment claims - though still elevated - are shrinking, key measures of the manufacturing and service sectors remain well into positive territory, and, as this week should show, both retail sales and industrial production remain on an upward trajectory.
No Wave is Good News For Stocks
While the election is still not certified, and court battles will drag on, it appears that we can draw two firm conclusions from the 2020 election. First, the pollsters were horribly wrong again. Secondly, American voters do not want a radical shift in economic policy.
Not Much to Miss
If you hadn't known that there was a Federal Reserve statement coming out today, you wouldn't have missed much. As if 2020 wasn't weird enough, there was a Federal Reserve meeting, and a new statement from the FOMC today, and virtually no one noticed. We guess that makes sense given everything that is going on. But, don't fret - nothing changed.
No More Lockdowns
As the US opened up, real GDP rebounded sharply in the third quarter, growing at a 33.1% annual rate. However, real GDP is still down 2.9% from a year ago and the economy got a huge boost from spending by the federal government, which borrowed from the future in order to allow people to spend today.
Economy Poised for More Growth
To reiterate, this Thursday morning we expect the government to report a huge, and virtually unprecedented, surge of a 33.4% annualized growth rate in real GDP growth for the third quarter. There are still a few monthly reports due this week that could affect our forecast, but only slightly.
GDP Soars in Third Quarter
There is nothing normal about the 2020 recession. Massive nationwide shutdowns of "non-essential" businesses caused real GDP to drop at a 31.4% annual rate in the second quarter, the biggest drop since the 1930s. However, as we expected, a V-shaped recovery is being traced out.
Profits Poised for Growth
COVID lockdowns crushed the economy in the first half of 2020, with real GDP down 5.0% at an annual rate in the first quarter and 31.4% at annual rate in the second quarter, the latter of which was the steepest drop in real GDP for any quarter since the Great Depression in the 1930s.
The Fed Gambles on Inflation
Over the past couple of decades, the Federal Reserve has coalesced around an idea about inflation that is little more than theoretical, with no real data to back it up. That "idea" is that 2% inflation is the "correct" amount of inflation.
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.