We believe we will be talking about the ongoing economic recovery for quite some time. We have already seen the strangest Recession occur in our lifetimes and the V-shaped bounce off the bottom has been anything but ordinary. While 2020 has been devastating for many on Main Street, Wall Street has managed to stay afloat and in many respects move forward throughout the summer and fall months due in no small part to Fed Policy keeping interest rates low and stimulating the economy by flushing corporations with cash.
All three major indexes, the Dow Jones Industrial Average, S&P 500 and NASDAQ have flirted with record highs within the past few weeks. While this has a boon to investors’ account balances, the pandemic has left many small businesses struggling at best and out of work at worst. In fact, job growth slowed considerably in November and unemployment remains at dangerously high levels. 1
We are hopeful that better news lies on the near horizon. Congress seems intent on reaching a new round of stimulus support to extend unemployment benefits and offer aid to those who suffered the harshest of economic hardship brought on by the pandemic.2 Stimulus spending has helped the economy by keeping demand for goods in the short term higher.
But if supply lags demand, we know that increases the chance of inflation. The Fed’s goal of keeping interest rates near zero through the end of 2021 seems to be set in stone but we will watch to see if pressure mounts to raise rates sooner if and when inflation climbs over 2%. For now, it’s a balancing act and we believe the Fed has done a good job with the many tools they possess.
There is a compelling case to be made for robust growth in 2021, however and any growth in the market should be buoyed by the pace of the roll out of the vaccine and stymied by any renewed shutdowns. First off, even in spite of the V-shaped recovery, the economy is still smaller today than it was one year ago – there is still plenty of run out to expand. And while big tech has allowed much of the economy to operate virtually, the damage to small service industry business has been dramatic. A return to normalcy, where we see unemployment back down under 4% will most certainly take years, not months. We expect with continued news about a vaccine and better unemployment data, long term interest rates should naturally drift higher as investors get more confident and see higher inflation.