It has been a consequential month so far to start the year. The longer-term implications are something I will continue to monitor closely. Earlier this week the Senate changed hands from Republican controlled to Democrat controlled. As well, we inaugurated our 46^th President of the United States. It was a record day on two fronts for the new President. He signed 15 Executive Orders on his first day in office, breaking the previous record of 1. The other record was the S&P 500 scoring its largest advance on an inauguration day in history, posting a 1.40% gain for the day. 

As for the Executive Orders, most involved issues relating to COVID-19, race and gender, and immigration. There were a few, however, that will be potentially impactful to the economy and thus the markets. A couple that could potentially cause impediments to economic and job growth involved climate change with the re-entry into the Paris Accord and the revocation of the permit for the Keystone Pipeline. This latter order also impacts Canada. 

A couple of Orders that may help with economic growth involve the extension of the eviction moratorium through the end of March and the suspension of federally subsidized student loan payments until the end of September. These actions may potentially put more money into consumers hands to spend into the economy. In the end, that is what will drive economic growth and stock market growth—people spending money. In the short-term, it doesn’t much matter where that money comes from. 

This is why I had indicated prior to the runoff election in Georgia on January 5^th that, with regard to the economy and the markets over the next couple of quarters, it didn’t’ matter who won as I felt the markets would respond favorably either way, but for different reasons. It is the same phenomena whether there is a Democrat President or Congress or Republican. The economy and markets over time have performed roughly equally under either. But once again, for different reasons. 

Congress is in charge of fiscal policy which typically involves taxes and budgeting. This past year it has also included stimulus. Republicans typically favor more austere government spending (but not always—see this past year) and lower taxes, believing that allowing the private sector—individuals and corporations—to keep more of their own money will enable them to spend that money into the economy and drive economic, job, and wage growth. And this drives the markets higher.  Democrats typically favor a more central government approach, raising taxes on individuals and corporations and then spending that increase into the economy. 

Either way, money gets funneled into the economy and helps drive economic, job, and wage growth along with stock market growth. And, the pendulum tends to swing back and forth every few years. I don’t see any fundamental changes to this dynamic and remain optimistic, for a variety of reasons, that our economy and the markets will see decent if not robust growth this year. Because again, it’s all about money flowing into the economy. Between fiscal policy in the form of stimulus and monetary policy in the form of low interest rates from the Fed, these are two meaningful tailwinds for the economy as we move forward into the year. 

Economists estimate that for 2020 we will have seen a roughly 4% decline in GDP. That would be the largest decline since 1946, a year when manufacturing dropped enormously after the end of WWII. Still, this is far better than most economists expected just six months ago. It’s worth noting that China is the only major economy in the world that saw economic growth. Their economy grew by roughly 4%. China has been slowly making gains with regard to economic size and might as compared with the U.S. With their economy growing 4% in 2020 and ours contracting 4%, their gains versus the U.S. were accelerated by many years versus there not having been a pandemic. Makes one wonder.  

For 2021, economists’ consensus is looking for a roughly 4% increase in GDP this year. If so, that would put us slightly below where we were a year ago. A year ago, our GDP was approximately $22 trillion in size. To date, Congress has passed a $2 trillion dollar stimulus package this past spring and more recently another $900 billion. They are looking to go back to the well for another $1.9 trillion. If that passes, that would be a total of $4.8 trillion or nearly 23% of the total current size of our economy. That is extraordinary and if it passes, I believe we will blow past 4% GDP growth in 2021. 

While that may be good news, there may be a day of reckoning down the road as this new bill, if passed, would push our debt to $21 trillion or roughly 100% of our current GDP. While that is alarming, it is not as alarming as it may have been in the past. I say that because of our historically low interest rates and the Fed’s commitment to keep them at these levels for the long-term. In the end, it isn’t the size of the debt that buries individuals, corporations or a sovereign state. It is the carrying costs of that debt that can force bankruptcy. With carrying costs on this new debt being near nil, it is not as concerning to me as it might be to others. 

Over the past couple of weeks there has been some economic data that could be a bit concerning, notably relating to employment and inflation. I believe these are outlier reports that will change in the coming months but we will dive into that in future commentary. In the meantime, it is worth noting that the S&P 500 finished 2020 with a gain 16.25%. The average diversified stock mutual fund returned 19.1%. Our Moderate Growth portfolio with a beta of 72 (72% of the risk or volatility of the S&P 500) returned 26.2%.

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Scott Barcomb