What a surprise to wake up yesterday to hear that President Trump and those closest to him have the coronavirus. Odds now favor, even more, a Biden victory in 6 weeks. Whether there will be a Democratic win in the Senate is still questionable, but clearly, the odds have increased on this, too. If all this comes to pass, we must consider portfolio adjustments to reflect where we may be going over the next few years under a Democratic administration. Historically, a Democratic administration has been good for the stock market as their programs tend to be highly stimulative to economic growth, which we believe will be the case.
We hope that both parties come together and pass a much need stimulus package sooner rather than later. It is needed to support the lower/middle classes and smaller/medium-sized companies in dire financial straits. We are also confident that the Fed will step up even more as needed to provide all the liquidity needed far in excess of needs to stabilize/support the economy.
We fully recognize that the financial markets hate uncertainty like now, but it is our role to look out over the valley; identify the emerging political, economic, and investable trends; drill down to country/industry/company analysis; control risks; and invest accordingly. The next President will be facing an economy that is shut down in many ways by the coronavirus; over 11 million people still unemployed, and small/medium-size businesses closing right and left. We look for major stimulus plans first before even considering tax hikes and added regulations that both may come down the road. We recognize that Biden could go for a tax increase on the wealthy using each dollar raised to reduce taxes on the lower/middle classes. It will be stimulative due to differences in the propensity to spend by income class if that occurs. Not so bad. But we remain against raising corporate taxes. It would penalize hiring, capital investment, research, and our global competitive position, which are sorely needed to sustain long-term economic growth, which is the only answer to funding our long-term problems.
The bottom line is that we have not altered our view that economic growth will accelerate sequentially in 2021 into 2022 regardless of who is President based on openings accelerating as rapid response tests roll out; effective vaccines become readily available by mid-2021; an overly accommodative Fed providing huge amounts of excess liquidity; multiple government stimulus programs including a huge infrastructure bill; and improving global trade.
We still favor moving to the more economically sensitive areas of the market to benefit from an improving global economy while maintaining significant exposure to technology where growth will sustain at least four times real GNP. We would continue to avoid bonds.
While we were somewhat disappointed with Friday’s employment report that showed only a 661,000 increase in employment after upward revisions over 100,000 for the last two months, many other economic data points reported last week were much stronger: consumer spending rose 1.0% in August while incomes declined due to less government support; total construction spending increased 1.5% in August led by private construction; the personal savings rate remains elevated at $2.43 trillion or 14.1%; pending home sales jumped 8.8% in August; the Chicago September Business Barometer surged to 62.4 in September; the ISM purchasing manufacturing index held at a strong 55.4 in September; new orders for manufactured goods increased by 0.5% while shipments rose and inventories continued to fall to multi-year lows. Finally, consumer confidence increased by the largest amount in 17 years to 101.8 in September.
While the economy is slowing after what will be an incredible 35% gain in the 3rd quarter GNP, it will still expand in the fourth quarter even without an additional stimulus bill. But the outlook for 2021 gets much better after the election regardless of who wins for all the reasons mentioned above. Next year, the keys are continued monetary/fiscal stimulus and getting our hands around the coronavirus, permitting sequential gains in openings.
We continued to hear last week about substantial progress on additional therapeutics and vaccines. Regeneron’s antibody cocktail was tremendously effective in reducing the virus levels while improving symptoms in patients. J & J came out and discussed the success its vaccine was showing in early testing and indicated that it expects to have ample supplies by mid-2021 to vaccine most everyone in America. We also heard from Abbott that its rapid response tests are finally in distribution and that the government had two hundred million test kits on hand already. All of this is good news supporting our view of the economy in 2021 and 2022 related to the virus. By the way, Becton Dickinson got its 15-minute COVID-19 test cleared in Europe and will be distributed widely within a few months.
It remains to be seen whether Trump getting the coronavirus alters the election. We were so disappointed by the first debate as it was personal rather than substantive. We were waiting to hear from Biden how his agenda would support growth over the next few years. While we are not broadly against a more progressive tax structure, we need specifics to see the full impact on the economy. We are against any tax plan, personal or corporate, that would penalize growth, capital investment, research spending, and hiring. Our economy must grow to fund all our needs, especially since we are an aging population. We just can’t continue adding trillions to our debt load without putting undue pressure on our future generations. Unfortunately, future debates are questionable, and we may never get answers to our questions before the election. Not good!
The outlook for a Democratic sweep in the upcoming election has improved, which gave us reason to review our economic and investment outlook. Interestingly, we have not altered our 2021 economic view as we would expect a Democratic administration to focus on bolstering the economy still partially shut down due to the coronavirus. Taxes will be addressed later. If Trump somehow won, we would expect the same actions to stimulate growth. Either way, the Fed will remain all in and be willing to do even more if needed. We hope that both parties can get together sooner rather than later on a new stimulus bill as we must help those most in need who are suffering big time.
We will take advantage of any weakness in the market to add to both the economically sensitive portions of our portfolio, which will benefit from a global recovery and technology where growth will sustain well above the real economy. It does not hurt that the Fed has our backs, and there are trillions of dollars sitting on the sidelines waiting to invest. We also like industrial commodities as we see a major global manufacturing cycle as inventories are at multi-year lows, and gold too. Continue to focus on the larger, well-capitalized companies that will continue to gain significant market shares against their smaller competitors. What a world!
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Remember to review all the facts; pause, reflect, and consider mindset shifts; look at your asset mix with risk controls; do independent research and …
Paix et Prospérité LLC