We are one month into 2021 and much of the uncertainty from the previous year remains, even as the distribution of COVID-19 vaccines begin to roll out and a new administration takes the lead in Washington, D.C. While it is difficult to predict precisely where the economy will head this year, there are certain factors we can consider to help frame our investment decisions and navigate these challenging times. Despite these heightened levels of uncertainty, we remain optimistic and believe 2021 and the years to come will produce strong gains economically.
The COVID-19 Virus
Predicting the trajectory of the economy must start with an assessment of the virus and the prospect of containing transmissions, which is required before social and businesses restrictions can be lifted. As of today, the FDA has approved two vaccines for emergency use authorization (EUA), with two more pending EUA in the next few weeks. Despite this incredible level of progress, the ultimate test of a vaccine’s success will depend on the efficiency of distribution and its long-term efficacy in light of virus mutations.
The Economic Cycle
It has been less than one year since the COVID-19 virus brought an abrupt ending to the longest economic expansion in U.S. history. We are now back to the beginning of a new economic cycle, typically marked by high unemployment, infusions of government stimulus, and concerns about an uncertain future – all of which are present today. While we do not want to downplay these concerns, and we recognize that it is difficult to draw historic parallels with today’s challenges, history has proven that it is a losing game to bet against the U.S. during uncertain times.
Congress and The Biden Administration
On Jan. 20, amid an ongoing pandemic and a deeply divided political climate, Joe Biden was inaugurated president of the U.S. as Democrats took control of Congress. One of the top items on Biden’s agenda is a $1.9 trillion COVID-relief package, which, if passed into law, would become the third round of government-backed economic support for individuals and businesses that continue to struggle in the wake of the virus.
From a historical perspective, the U.S. government has traditionally implemented substantial stimulus programs in response to severe economic challenges, such as the New Deal after the Great Depression and the building of the national highway system after World War II.
Congress passed the first two rounds of COVID-related stimulus in 2020 to prevent the economy from deteriorating. Today, unprecedented stimulus proposed by President Biden and supported by a Democrat-controlled Congress could offer a clear path to get the economy back up to pre-COVID levels quickly. Although such a large government-relief package will increase the federal deficit and put pressure on the government to eventually increase taxes, the focus today is and should be on giving the economy the boost it needs to get back to full speed as quickly as possible.
U.S. and China Relations
It will be interesting to see how the Biden administration will carry out its plan to be “tough on China,” as trade tensions between the world’s two largest economies have escalated in recent years. It is further expected that China’s economy will continue to grow and challenge, if not surpass, the U.S. for global supremacy within the next decade. While a quick separation between the two countries would create broad challenges for the global economy, a slow and measured decoupling could be beneficial with both countries working to ensure their separate economies are strong for leverage and negotiating purposes. Additionally, a decoupling could lead to more jobs returning to the U.S. and a more domestically driven U.S. economy that is more responsive to monetary policy.
One positive result of the pandemic has been the rapid, forced adoption of new technology, both in business and in our personal lives. Prior to the pandemic, technological advancements, such as 5G and artificial intelligence (AI), were poised to give the economy a significant boost. The pandemic accelerated this theme by not only forcing consumers and businesses to adapt to new technologies but also ushering in a greater willingness for them to embrace the adoption of these new tools. We believe that this greater reliance on technology will allow the U.S. to allocate time and resources more efficiently post-pandemic, making the country more productive and ultimately leading to higher economic growth in the future.
The Federal Reserve
As Congress debated the merits of proposed stimulus packages, the Fed responded to the virus immediately with accommodative policies that we expect to continue in the future. In doing so, it followed through on its mission to avoid letting politics get in the way of delivering support when it is needed. The chart below illustrates the Fed’s financing of government spending via quantitative easing and holding U.S. treasuries on its balance sheet (blue line), and the impact on the Federal Budget deficit (red line).