Markets, Economy, Election, Coronavirus
September 9, 2020
Most people tend to focus on what’s happening now or what happened in the recent past (often 30, 60 or 90 days). It’s easy to lose perspective. Let’s remember, the S&P 500 Index started 2020 at 3,278 and grew to 3,386 by February 19th. Then, plummeted to 2,237 by March 23rd. As of this writing, the S&P 500 Index stands at 3,508. As I’ve listened to analysts/economists over the past two months, there is not a consensus on where the S&P 500 Index will end the year.1 The more optimistic ones are targeting 3,650 which is where most targets were before all the chaos erupted. There is still an opportunity for volatility between now and year-end especially in an election year. We all just need to remain focused on our long-term goals and not allow ourselves to be overly influenced by short-term uncertainty and volatility. It is a fool’s errand to try to time the markets.
The worldwide economy was rocked in March and April by the forced business shutdowns in reaction to the coronavirus. The U.S. GDP was down 32% annualized in the 2nd quarter. By May our unemployment rate had soared to 13.0%. In April, the ISM manufacturing index bottomed out at 41.5. Despite persistent shutdowns in many states, the economy has been resilient and made a remarkable turnaround. The Atlanta Fed is projecting 3rd quarter GDP at a positive 29% annualized. In August, the ISM manufacturing index jumped up to 56.0 (above 50 is expansionary). The unemployment rate has dropped below 10.0%. Due to the massive disruption in certain industries (i.e. airlines, hospitality, restaurants, etc.), unemployment will remain stubbornly high for a couple years. It is a healing economy.2
Election day is less than 60 days away. This election could be significant particularly because of the stark differences in policy perspectives between the two candidates, especially with respect to taxes and regulation. Past election data shows that the markets favor a split Congress. If Biden wins the presidency, but the GOP retains the Senate, tax increases are likely dead on arrival. In the scenario where Biden wins and the Democrats take the Senate, we will likely see tax increases on corporations as well as individuals. Current Democratic proposals suggest a raise in the individual tax brackets back to where they were prior to 2017 and a raise in the corporate from 21% to 28% (it was 35% prior to 2017). Most analysts/economists believe these tax increases could hinder economic growth but would not significantly impact the markets long-term. It’s more difficult to handicap the economic/market impact of other proposed Democratic policy initiatives, but if things were to stack on top of one another, the impact could be very negative. Only time will tell.
The CDC recently posted a report indicating that only 6% of reported deaths were from Covid-19. Many news outlets and most of social media misrepresented what this report was actually telling us. Only 6% of the deaths were solely from Covid-19. The other 94% of deaths included comorbidities (on average there were 2.5 comorbidities) many of which were exacerbated by Covid-19. Other CDC data tells us that 80% of the deaths were folks over age 65 with a median age of 78. The good thing that all this data clearly tells us is what demographic is most at risk (comorbidities and over age 65). Improving risk mitigation strategies for this vulnerable group along with the continuing rapid release of treatments and vaccines, should allow us to quickly put Covid-19 in the rearview mirror.
The most important point I will emphasize here is the need for a financial plan that has built in flexibility to allow you to deal appropriately with any contingencies that may arise. This allows you to avoid making rash decisions when reacting to short-term disruption and volatility.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
2 Brian Wesbury, First Trust economist