Trying to Make Sense of it All – Update #3
by Marshall W. Gifford
I sit here now in my office, not somewhere remote, putting my thoughts on this strange year in writing. Since my “Case for Optimism” piece in March, so much has changed. The world we live in is different. Some of those differences will be permanent and some will be fleeting, but the changes that stay will be for the better and will be the ones we collectively choose to keep.
They will make the world more productive, efficient, cleaner, and safer. World changing innovation rarely happens when we are comfortable and secure. It happens when a problem needs to be solved during times of crisis, danger, or suffering. The ripple effects of the changes to this world will be extrapolated over our lifetimes. We won’t be able to see clearly all the impacted facets of our lives until we can look back over time. From the captain’s bridge, the waters are still choppy, but as I look out over the horizon, I see partly cloudy skies and the long-range forecast is still calling for sunshine.
In this update, I wanted to provide some perspective by sharing my thoughts on current circumstances and answers to questions I've been asked recently. In my 27 years as a financial advisor, this has been the oddest year to navigate. The beginning of the year, which seems like 3 years ago, started out great. The economy was extremely strong and the proverbial seas were calm. It became evident in late February that there was a great deal of uncertainty surrounding Covid-19 and what the impact would be on the global economy. The following six weeks resulted in the quickest drop ever in our market history1, followed by a mandated, unprecedented shutdown of the economy. This resulted in the fastest and steepest recession in recorded history.2
On March 23, the Federal Reserve stated, “The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time and thereby promote its maximum employment and price stability goals.”3 Then between direct payments to citizens, the Paycheck Protection Program, and other programs to support the economy, the Fed injected over $3,000,000,000,000 into the economy.4 Enough, if spread evenly, to give every man, woman, and child in the United States about $9,000 each. This is an extraordinary amount of money. Our markets quickly reversed course and what followed has been one of the best five-month periods in market history.1 We now sit at a point where a contentious election is looming and the markets have recovered, or nearly recovered, depending on the index. Unemployment is coming down, but is still very high in the leisure and hospitality sectors.5 We have multiple vaccines that look promising and should be available later this year and into 2021. We also have a budget deficit of nearly $3,500,000,000,000.6 How do you make an investment decision out of this and how does this impact your portfolio?
First, there is no evidence that any one political party is better or worse for the markets. Republicans who felt the Obama administration would be bad for the economy missed out on large gains. Democrats who felt the Trump administration would be bad for the economy also missed out on large gains.7 This is a repeated cycle when investors extrapolate their political views to their investments. Regardless of how the election goes, there will be companies that do well. Certain industries should do better under a Trump administration and other industries, such as green energy, would likely do better under a Biden administration. Either way, there are great companies to invest in, regardless of elections, and this has always been the case. Please don’t confuse your politics with your investment strategy.
Regarding investment diversification, we still feel it is important to continue to own a diversified portfolio of both U.S. and non-U.S. assets as part of an overall plan. Non-U.S. markets have also not bounced back to the same extent as the U.S. market, but as the vaccines become more widely distributed the entire global economy will benefit. There are currently five vaccines approved for early or limited use and nine in large scale efficacy testing. Keep in mind the U.S. is only about 340 million of the 7 billion people in the world. Put another way, only 1 in 21 people in the world live in the United States. This leaves plenty of opportunities around the world in which to invest, outside the USA.
I’ve also been fielding questions on why the market has continued to climb when the economy isn’t fully recovered. As I noted in May in my “Update from the Bridge”, markets look forward. Markets are pricing in a vaccine later this year into 2021. Unprecedented stimulus money is entering the economy at a time when alternative assets like bonds and cash are paying almost nothing. The Fed cut interest rates to 0-0.25%. Now that money is seeking some sort of a return. The pent-up demand of consumers along with competing assets like bonds and cash paying very little, should lead to money flowing to places with some potential for return and this trend has been favorable to stocks.
In addition, virtually every business in the world was forced to look at their bottom line and cut costs. As consumers have started spending money again, these businesses do not need revenue to return to where it was to have profits be the same. So as the world returns to normal, you have millions of more efficient businesses around the world that will be operating more profitably. This severe recession caused every business to look at what they needed to survive and most got rid of what wasn’t necessary. This could be a tailwind for corporate profits.
Lastly, I wanted to provide some perspective on the national debt. This is probably the hardest thing to fully grasp. Where did the approximately $3,000,000,000,000 come from? Unlike most of the U.S. national debt that is issued and bought by citizens, banks, pensions, etc. in the United States, this $3T wasn’t purchased by a person. The U.S. Treasury issued the debt at about 1.3% interest for 30 years8 and the Federal Reserve bought it, so the treasury owes the interest to the Federal Reserve. The Federal Reserve is a non-profit arm of the U.S. government. As a non-profit entity, if the Federal Reserve has profits, it gives the funds back to the U.S. Treasury. After deducting operating expenses of the Federal Reserve, the interest the treasury pays gets paid back to itself. The interest is both an expense and revenue to the treasury. This is different than interest paid to you or me in our money markets or bond funds. This could certainly be problematic, long term, if the government makes a habit out of trying to print our way to prosperity. If you print money without a corresponding increase in output, you have more dollars in circulation chasing fewer goods, which should result in inflation. The last time we had deficits this large was during WWII.9 However, when the economy shut down, to avoid economic collapse, I don’t think there was much else we could have done and I have not heard anyone argue that this was not the correct move, given the situation. We now have to get back to growing the economy, which is happening. As long as there is confidence in the United States, the repercussions of this temporary period of time should not prove fatal to our currency or economy.
As I noted in March, in my “Case for Optimism,” and again in May, we live in the most innovative and adaptive country in the world. You can get hung up on the constant media barrage of all that is bad and could happen or you can study history. Granted we have a pandemic, but we are still living during the greatest time in the history of the world. The good old days are a myth. Check historical data from 20, 30, or 40 years ago compared to now on GDP per capita around the world, life expectancy, violent crime, internet access, banking access, education, global hunger, access to fresh water, and poverty. All have improved dramatically.10 Now going forward, many have the ability to work from anywhere. This equates to less traffic, less time wasted, and more time with family. Even those that still drive to work have noticed the reduction in commute times and freeway congestion.
Trust me, the world isn’t getting worse. It’s getting better, but some of the innovations that are allowing us to live amazing lives have also given us the ability to see more clearly all that is bad in the world. It’s not that there is more bad in the world, it’s just that we now see it in the palm of our hand. Unfortunately, the media knows people don’t tune in to watch a family eat dinner together because everyone is home, watch someone walk without pain after years of suffering following a hip or knee replacement, or cover a family’s reaction after doctors cure what was previously an incurable disease. They don’t bring you to the back of a small business to watch the first sales go through via their new online store. What sells ad revenue is divisiveness, violence, chaos, fires, and storms. Remember, its not news when a dog bites a man, but it is when a man bites a dog. We are at a pivot point in the history of civilization and I am excited to see what opportunities emerge as we exit 2020 and enter 2021 and beyond. Thank you for your confidence as we navigate this turbulent year together.
Marshall W. Gifford, CLU, ChFC
Founder & Senior Partner*| Founder, North Star Medical Division
Gifford Financial, The MD & DDS Specialists
A Division of North Star Resource Group
2701 University Avenue SE Suite 100
Minneapolis, MN 55414
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. 10-2020
1Source: The Motley Fool; https://www.fool.com/investing/2020/09/10/5-ways-the-stock-market-has-made-history-in-2020/
2Source: The World Bank; https://www.worldbank.org/en/news/press-release/2020/06/08/covid-19-to-plunge-global-economy-into-worst-recession-since-world-war-ii
3Source: Federal Reserve; https://www.federalreserve.gov/newsevents/pressreleases/monetary20200729a.htm
4Source: Brookings; https://www.brookings.edu/research/fed-response-to-covid19/
5Source: FiveThirtyEight; https://fivethirtyeight.com/features/yes-unemployment-fell-but-the-recovery-seems-to-be-slowing-down/
6Source: The Balance; https://www.thebalance.com/current-u-s-federal-budget-deficit-3305783
7Source: Forbes; https://www.forbes.com/sites/sergeiklebnikov/2020/07/23/historical-stock-market-returns-under-every-us-president/?sh=6389d8d0faaf
8Source: Forbes; https://www.forbes.com/sites/simonmoore/2020/08/02/is-us-national-debt-g... hand/#6b5b52702f19
9Source: The Wall Street Journal; https://www.wsj.com/articles/u-s-debt-is-set-to-exceed-size-of-the-economy-for-year-a-first-since-world-war-ii-11599051137
10Source: Our World In Data; https://ourworldindata.org/charts