Two weeks left of December means 2020 is finally coming to an end. It’s been a tough year for all of us. Some more than others and some less, but we are all in it together and we’re going to get through it together. Vaccines are being widely distributed now and into 2021, and I for one am looking forward to the day where I can put the mask/hand sanitizer down and see my family and friends without worry. The stock market is looking forward to this as well. The Fed is using it’s “full range of tools” to keep the economic expansion continuing, and the economy is already showing signs of life. Aside from record COVID cases in America just consider this dynamic; Vaccines on the way, divided government (positive), consumer is healthy, artificially low interest rates, high productivity and higher than expected GDP. Us, along with many of Wall Street’s top strategists see solid growth for the foreseeable future. This doesn’t mean there aren’t headwinds though.
Pfizers vaccine is already being widely distributed in America to the people that need it most. Modernas vaccine is next and what follows that is some sort of control over this virus. By the summer of 2021 we might just have this under full control. When that day comes, I see the American consumer being exhausted of sitting in their houses for the past year and half. What will they do? They will go out and spend money, facilitate the circulation of capital, travel and live a normal life. By “normal life” I mean operating in their world without worry of catching COVID. I do think there will be somewhat of a new normal, but I don’t think life will be drastically different. I see companies adopting a hybrid work from home atmosphere where employees work in the office part time and at home other times. This will allow companies to cycle employees on specific days to keep operating expenses low and not need as much office space. How is that for efficiency? It’s just an idea of mine but we will see what happens when the time comes.
At this week’s FOMC (federal open market committee) meeting the fed announced they will not change anything regarding monetary policy. They’re keeping rates where they are and have no plans to change rates until 2023, and that came as a surprise to nobody. They also provided their economic outlook and although it remains “extraordinarily uncertain”, they revised their GDP higher and unemployment rate forecasts lower. That is great news. The economy has recovered from the self-induced recession stronger than the Federal Reserve thought possible, and I believe it will continue to surprise. People want to get their lives back, and the lives people were living prior to COVID create a recipe for strong economic growth.
If inflation surges higher than the Fed predicted, they will be forced to raise rates to keep the inflation in check. The markets will then see this as a negative and probably correct. But think about the last time the Fed raised rates in December 2018 (Christmas Eve), the S&P 500 corrected around 12%. The next year (2019) the S&P 500 rose 28% and so far in 2020 it’s up around 14%. Did that 2018 correction even matter? To those that sold it most certainly did. We don’t think there’s an immediate worry here. If the Fed says they won’t change rates until 2023, they obviously think inflation won’t get out of hand. In the meantime, with COVID-19 approaching the final stages, a divided government, healthy consumer, artificially low rates, high productivity and higher than expected GDP; the economic expansion can continue for the foreseeable future.
