By Tim Courtney, Chief Investment Officer
We have used two avenues to address this year’s economic challenges amid the pandemic. First, when markets were falling so quickly1 that market liquidity began drying up and even some safer assets were faltering, the Fed swiftly cut interest rates to zero, provided lending facilities and actively purchased securities.2 These steps stabilized markets and supported prices for bonds, stocks, commodities and homes.
The second avenue was fiscal policy. The U.S. government put together a sizeable package that included checks for individuals and increases to unemployment benefits.3 This was meant to keep deteriorating household finances afloat until companies could restart their operations and hiring post shutdowns.
The Fed has done its part, and probably then some. The focus is now on how fiscal stimulus can sustain households through a period of gradually improving employment.
Ideally, you would like for “stimulus” to do what it is supposed to do: stimulate greater economic activity. That is not really what the first round of fiscal spending did, though. Households used much of those checks to pay down debt and greatly increase savings.4 Going into the pandemic, we had a savings rate of about 7%.5 By contrast, April and May saw savings rates of 24% to 33% as households did the responsible thing and prepared for a tough year ahead.5
We believe we will almost certainly get another round of fiscal spending soon.6 Many of the companies that were counted on to rehire workers remain weak or have shuttered their doors. Some of this has been caused by consumer choice, some by government choice. This has hampered a healthier recovery from forming and left claims for unemployment elevated.7
While a second round of spending may not have immediate economic effects, it very well could lay the foundation for a long-term recovery. Household finances should improve with less debt overhang, lower rates and more money in savings. This, along with an improving hiring environment, should boost household confidence and help spur deferred spending and growth in future quarters.
We should note that none of this happens in a vacuum. There are costs to shutting down the economy and implementing these measures. As savers, cash pays virtually nothing, and bonds can generate only very low returns. With national spending and debts accelerating, we also face the risk of future inflation and/or dollar weakness. The Fed has recently said it would be willing to let inflation run higher than its 2% target for some time.8
We think the political pressure will force at least one more round of stimulus spending. It will be yet another cost of the pandemic, but will likely lay the foundation for future growth, spending and an earnings recovery.
Sources:
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this informational piece. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information being provided herein. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971