Solving for X in 2020

As economists everywhere debate projected outcomes and roads to recovery, we’re also seeing several theories that attempt to predict what the path to recovery will look like. One leading idea is that we will see a K-shaped recovery¹, where the top part of the “K” is relatively short and represents the people and organizations doing really well, and the bottom part is much longer and represents those who aren’t.

This asynchronous recovery was one of the key topics discussed in our recent Thirdly, which also covered other timely considerations such as the ways in which COVID-19 continues to impact the markets and whether or not the stock market will be affected by the election.²  CWM Chief Investment Officer Morgan Arford summed up the event with his Twitter-worthy executive summary:

“Stock markets have no party affiliation, but future policy matters. We remain focused on the data and defensively positioned while awaiting higher probability set ups for greater risk exposure. Low interest rates / easy money policies continue to support high market valuations.”

Here’s a look at some of the biggest economic influencers at this time, based on our proprietary algorithm and tried-and-true investment philosophy.

• COVID-19 maintains its grip on the markets. We’re facing several uncertainties amidst a backdrop of renewed lockdowns in Europe, new cases in America on the rise, the beginning of flu season, uncertainty around the risk of reinfection, and the current absence of a viable and widespread vaccine. There is good news on the horizon with stock markets reacting positively to the announcement from Pfizer of a COVID-19 vaccine with 90% efficacy. There is some concern that the infrastructure is not in place to feasibly distribute the vaccine to a large population, along with worries about receiving a vaccination that was fast-tracked into production. Doctors, however, assure us that vaccine trials have followed protocols. These uncertainties and potential economic restrictors have the potential to be disruptive to the markets, considering the effects of possible shutdowns and insufficient stimulus on GDP.

• Temporary losses can become permanent, especially in the case of unemployment and business closures. We are seeing that some job losses are now permanent as business becomes no longer viable in certain industries, as with hospitality services such as restaurants and hotels. The higher sustained unemployment rate leads to future bankruptcies, not to mention higher delinquencies on loans or credit card bills. Additionally, we expect to see even more corporate bankruptcies in 2020-2021 than in the 2008 recession.

• The initial government stimulus supported the U.S. economy months ago; now, the absence of additional stimulus threatens to drag it back down. The CARES Act replaced the lost income of many Americans, even leading to some unemployed residents receiving more money than they earned when working. This extra money allowed many people to boost savings, pay rent, and continue to buy consumer goods and services for the home, ultimately helping the economy for a time. Now, without additional stimulus on the way, personal savings are running out and job loss remains high. With no new stimulus imminent in the last quarter of 2020, we could end up seeing a more impactful income hit than what we saw in March when our lives first began changing due to COVID-19.

• Time is running out to take advantage of low rates for home refinancing. As you may have read in our recent home refinancing blog post, now may be a great time for you to refinance your home after the Federal Reserve cut mortgage interest rates. In our July Thirdly, we began discussing refinance opportunities in the conforming loan market.²  Now, the jumbo market is also showing favorable opportunities to refinance. We have reason to believe these opportunities are fleeting, since the government will have to borrow $5 trillion more to fund deficit spending, increasing the probability of higher mortgage rates. If you’re considering a home refinance, please feel free to connect with our advisors Brian and Marc, who can help you make an informed decision based on your circumstances.

• America cannot borrow forever, and it may be a good idea to plan for inflation now. The treasury and the Fed have propped up the economy throughout the many challenges of 2020, but they cannot hold out forever. These agencies are looking at borrowing 50% of spending this year, which is higher than their total budget from 2004. It is impossible to borrow this large of a percentage share indefinitely, which creates issues for borrowing costs. Right now, the deficit is rising at a $120,000/second. Numbers like these can occasionally point to inflation, it’s in consumers’ best interest to plan for it regardless.

• Elections don’t affect the stock market, but future policy will. The stock market is not partisan. Though there are graphs comparing partisanship, a closer look will reveal that correlation does not always equal causation. As you may have heard from us around election day, there is no need to panic over stocks plummeting due to an election outcome as stocks typically perform relatively the same regardless of the party affiliation of the president or control of Congress. You’ll want to keep your eye on the months following the election as policy changes are developed and implemented. The CWM team will continue to stay on top of new developments in government policy and how those changes may affect tax plans moving forward. We will communicate any key updates with clients as we learn more.

As we share these insights, it becomes impossible not to reflect on all we have endured in 2020 and to imagine the future we hope to create. Though we must navigate a world of uncertainties, we will maneuver through, together. What matters most is how we make sense of these variables around us to make clear-headed decisions without fear.

That’s why CWM maintains our investment philosophy in which limiting large losses is more important than capturing all market gains. We are currently seeing an expensive market, which creates high-risk scenarios, especially given the ambiguity outlined above. With that said, there are some positive signs on the horizon, so we’re taking a market-agnostic approach. It is less conservative than how we began in January, but still relatively conservative as we work to help clients reach their lifestyle goals.

As always, the most we, as both people and investors, can do is focus on what we can control — not on what we can’t. You can continue to rely on the CWM team for updates and insights, as our priority remains anchored in helping individuals and families define their own ideas of what it means to live richly. If you have any questions or concerns about the current market, please don’t hesitate to contact us here or give us a call at (425) 778-6160.

¹ K-Shaped Recovery Graph courtesy of the U.S. Chamber of Commerce.
² Clients can view recordings of our latest Thirdly presentations via CWM’s client portal.