The second quarter of 2020 saw the worst quarterly decline in economic terms since the Great Depression of the 1930s. The US economy literally fell off the COVID cliff. This downdraft side of a very sharp “V” has already made an economic bottom. (It was foretold by the March 23 low in the stock market.)
The third quarter of 2020 is the first recovery quarter, and that recovery is extremely sharp because it is coming from such a depressed bottom. From that brief and ugly low, we have seen an uncertain US recovery. The same is true of the entire world. So all that we do and say in the United States has to be in the context of a global downdraft and a global recovery. The US economy and financial market are so large that global shifts often impact some part of America. This has been exaggerated since the Trump administration launched its isolationist and protectionist policy a couple of years ago. We see the latest version of that policy with China (WeChat and TikTok.)
We also see the penalties from that policy in certain shortages in the US and in blockages or delays in supply chains. We also see it in the increasingly belligerent rhetoric exchanged with our trading partners. China is the most notable example. A recovery from the worst shock in a century is impaired by isolationism and protectionism and blame game rhetoric. These factors add to uncertainty, as market agents and businesses aren’t sure of the policy path and are therefore slower to commit capital to a recovery trajectory. The exceptions have been in the technology and healthcare sectors, which include companies that are beneficiaries of the pandemic. Yes, in every shock there are winners and losers. Technology and health care are winners; hospitality and cruise ships are losers.
In addition to the COVID-19 shock and response, the United States is embroiled in an intense political fight and a very close election. Most analysts show Biden leading in polls, but the Electoral College holds the key to the election outcome, and most polling shows that the Biden Electoral College lead over Trump is narrow. We think this election is too volatile to call and have not positioned portfolios for any election outcome. There is plenty of evidence to suggest that economic outcomes and market responses can be estimated under Trump-win or Biden-win scenarios but there is no high probability of either outcome so caution is in order. Meanwhile, the prospect of very low interest rates for an extended period, probably several more years, is a force that powerfully influences markets and the economy.
Many economists are concerned about the political fight playing out in the Congress around the passage (or not) of a substantial additional fiscal stimulus package. As this is written, the House package that exceeded $3 trillion is a non-starter. The Senate counter was also a non-starter. There is narrowing of negotiation in the $1.5 trillion to $2.2 trillion discussion. Both political parties’ leaders have expressed some willingness to talk, but neither has made the moves to get to a serious agreement yet. We hope they reach it prior to the September 30 deadline for government funding. Meanwhile, the country suffers from the Covid economic shock. If we add the actual count of the unemployed to those who are receiving some form of COVID-19 assistance, the total is about 29 million people, or about 19% of the US labor force (estimated at 160 million total). That is a huge unemployed cohort, and many of them wait for federal help. Millions have lost purchasing power for necessities like food and health care and may face eviction from their homes. Thus the division in America widens between the haves and have nots. That split cannot help accelerate an economic recovery; it impedes it.
We enter the fourth quarter waiting for well-tested COVID vaccines and safe, proven treatments, and we hold our breath for a peaceful and uncontested election outcome. That is where we are at the end of Q3, 2020.
David R. Kotok
Chairman of the Board & Chief Investment Officer
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