The Economy Slows, But Powers Through the Headwinds

Economic growth slowed in recent months, and much of the economy still is at depressed levels. Yet, the economy is doing better than expected. The big question for me has been how well the economy would hold up once the fiscal stimulus began winding down after July. While the rate of growth slowed substantially, the economy continued to grow.

One factor is that households saved a lot of the stimulus received during the spring and summer and became comfortable drawing on savings to support spending in the second half of 2020. Household confidence also was helped by rising prices for stocks and homes.

The monetary stimulus from the Federal Reserve has supported these markets. Key sectors of the economy remain battered. The travel, entertainment and leisure industries are the worst hit. The fear was that the continuing depression in these sectors could drag down the rest of the economy.

That hasn’t happened.

The sectors that experienced little change or that benefited from the pandemic economy were sufficiently strong that, along with fiscal and monetary stimulus, they could support the rest of the economy.We roll into 2021 with two additional boosts to the economy on the horizon.Congress is finally agreeing on new fiscal stimulus.

Though the level of stimulus is smaller than the initial stimulus in March, it should be sufficient to boost growth a bit. In addition, more stimulus is likely in the coming months.Perhaps more important is that multiple vaccines appear to be on the way. Though it will be months before the vaccines are widely administered, eventually they should help heal the economy.

The combination of additional stimulus and the vaccines should cause a bounce in growth by mid-2021. Also, unlike some other observers, I don’t expect the Fed to throttle back its monetary stimulus anytime soon, also aiding markets and the economy.

Yet, the scars from the pandemic recession are serious and will be long-lasting. There still are about 10 million fewer jobs now than before the pandemic, and many businesses have closed. A big long-term question is which changes in consumer and business behavior will be permanent. For example, there are estimates that one-third or more of pre-pandemic business travel won’t be resumed, because people now are comfortable conducting business differently.

That’s only one example of potential permanent changes in behavior.The changes in behavior could leave economic activity lower than the pre-pandemic level for some time as the economy adjusts.

Investors need to plan for the probability that investment returns in the coming years are likely to be lower than they’ve been in some time, maybe ever.

That’s because interest rates are at historic lows. Returns of stocks and other investments are based on the risk-free rate of return, which is the yield on short-term treasury debt. Over time, returns on stocks and other investments can exceed the risk-free return by only so much.

Only a few pockets of the investment universe are extremely high valuations or in bubble territory. But the strong returns stocks and a few other investments had the last few years aren’t sustainable indefinitely. Because of these factors, it is import-ant to maintain a margin of safety in all your investments instead of chasing high returns.Many investors still are underinvested in Asian emerging market equities.

The Asian emerging economies were the first to be hurt by COVID-19, but also contained the virus better than most others and bounced back faster.

The data coming out of most of Asia indicates growth is much stronger than in Europe and stronger than in the United States.

Overall, Asian economies don’t have as much debt as the developed world and are able to sustain growth without interest rates near zero. China sets the pace for the Asian economies and markets. The country’s latest five-year plan emphasizes opening its markets and making its currency more attractive. These actions will make the markets attractive to more investors and should support stock prices.