It's morning in America" President Reagan's iconic political ad captivated the nation in 1984. The message has remained relevant because of the emotional chord it struck. See, that generation was scarred by runaway inflation and a blistering double-dip recession coming out of the 70’s, and President Reagan challenged us to look forward to the future and to have confidence in it. Today, nearly 95% of the US economy, as measured by GDP, is in the process of reopening from the pandemic shutdown. Better times are ahead as the economy wakes up from its artificially induced slumber. Many companies are resuming limited operations and recalling workers. And many of us have only recently ventured out for the first time. Now it’s time to begin rebuilding this economy, one business, one job, one paycheck at a time. We will do so with greater attention to personal space. We will wear masks and gloves. We will subject ourselves to thermal imaging and antigen testing. We may even have our contacts traced. It will be a gargantuan effort to keep us safe from a danger that hides among us, around corners, on door handles and down grocery store aisles. Many of the measures taken to flatten the COVID-19 curve will have long-lasting effects on economic growth and consumer behaviors. It’ll also have significant investment implications. Here's what we expect.
The recovery from this recession will be slow, and slower than many want to believe. Asia, having dealt with the virus first, has a head start on the rest of the world. The US is the next major economy to begin its recovery. Europe, Japan and many other emerging markets are likely to trail. Despite the dynamism of the US economy relative to the rest of the world, and despite what the President is saying, we probably shouldn’t expect the recovery to resemble anything like a "V-shape." The nonpartisan Congressional Budget Office (CBO), recently released new estimates showing that US GDP would not recover its prior peak until 3Q 2022. The risks to growth remain, in my opinion, skewed to the downside.
The tepid recovery will largely be a function of elevated joblessness. In a services-based economy, one person's spending is another's income. Coming out of recessions, consumers normally pay down debt and increase savings. With the consumer comprising around 70% of the US economy, an increase in savings has a negative effect on growth. In turn, that will put downward pressure on interest rates, housing prices and the stock market. Interest rates are going to be what they are. If you have your money invested in a savings account or a fixed annuity of any type, and interest rates go down, you can look for the interest rate on your account to go down, too. Your home, by the very nature of it, is a long-term investment. It is also known as a “use” asset. You use it to live in while the value of it increases. And the stock market, going forward, will be nothing like the one we saw for the last 11 years. During the last decade one could buy just about any index fund and do well over time. For the foreseeable future one will need to be much more careful about what he buys, how long he holds it and when he sells it. He’ll need an investment strategy. He’ll need to be active in how he invests. It’ll take more time, and more effort to handle your investments. Or you can hire someone with active management experience. ProVest started experimenting in active management in 2004, and switched to being a full-time active manager in 2012. We have been in and out of the market several times this year, and we will be in and out several more. We don’t get in… or out of the stock market on a whim, or on emotion. We get in or out based on solid research. Our aim is to give our clients the opportunity to make a stock market-like return when the market is going up, while mitigating a lot of the risk during volatile and uncertain times like we’re in right now. We certainly don’t want the people we serve thinking they must settle for a low interest rate like what they’ll find in a bank or fixed index annuity just because the stock market is going through some temporary gyrations.
Confidence is the key as the economy adjusts to COVID. The rebuilding cycle will be long, joblessness will remain elevated and debt burdens will cast a shadow over financial flexibility. Companies will face inefficiencies as they shift supply chains, operate below full capacity and face new healthcare costs. The strong companies are likely to get stronger, while headwinds will increase for weak ones. But there will be a point when people start to look confidently into the future, whether via a vaccine or treatment, or simple resiliency. People will innovate and adapt, as they always have. We are a dynamic country with a dynamic economy, because we are a dynamic people.It would be foolhardy to bet against this country.