The election’s over, and not much changed. Not much will change for at least several months. After major elections, regardless of the results, I urge my readers not to overhaul their portfolios in response to the election. Too often, I hear people advising investors to make significant changes because of what they say are the inevitable consequences of the election. The advice usually is an overreaction and very wrong.
An election doesn’t change an economy or the markets in the short term. Even after there’s a significant change in power, which didn’t happen this time, it takes a while for new policies on taxes, spending and regulation to take effect. There are two main drivers of economic activity for now: COVID-19 and monetary policy.
The Federal Reserve and monetary policy are the main drivers of the economy, and there are no changes there. The Fed is continuing its aggressive monetary policy and will do that for some time.
Most other central banks are taking similar actions.We continue to have two separate economies. Some sectors are doing very well, either benefitting from the pandemic or not being affected by it. Other sectors continue to struggle. A key issue over the next few months is whether this bifurcated economy can continue indefinitely or whether the lagging sectors will drag down the others.
A second issue, which is related, is how much fiscal stimulus is needed to replace the income lost by the portions of the economy that are closed or operating at reduced capacity. The main fiscal stimulus measures expired at the end of July and haven’t been renewed. While the economy has rebounded significantly from the low point of last spring, gross domestic product (GDP) still is well below its high and at a very depressed level.
Even so, the economy has been resilient despite the lost stimulus, surprising many analysts.Household spending continued to increase after the stimulus expired. At the end of September, spending was only about 2% below February’s peak.
That’s largely because during the pandemic, many households saved a large portion of their stimulus payments. The savings rate increased dramatically, and many households were able to add to their net worth.
Many businesses also were able to reduce their debt levels.Those are the aggregate effects for the economy. Many households and businesses have been hurt badly by the pandemic.
More savings and less debt enabled the economy to continue growing after the fiscal stimulus expired.
We have to monitor the data closely to see if this is sustainable. Data from the last couple of months indicate the economy continues to grow, but at a slower rate than during the early part of the summer.
Stalling and faltering sectors of the economy could drag down the rest of it. Fed officials have said they don’t believe economic growth will continue for long without additional fiscal stimulus.
News about COVID-19 is driving the markets and economy less and less, except for positive news about treatments and vaccines. People are adapting to the virus as a regular part of our lives.
The fiscal response has been more important to economies around the world than control of the virus. The stronger the fiscal response, the better the economy has done, even if the control of the virus appears to be poor, as in the United States.
The most likely scenario now that the election is over is that some level of fiscal stimulus will resume in the United States and the Fed will buy the debt generated by it. Ideally, the stimulus will be targeted better so that more of it goes directly into the economy instead of the investment markets.
The Fed will continue to buy government bonds and other assets as long as it needs to or until inflation rises to the point that the decline in purchasing power of the dollar becomes painful.