The COVID-19 Recession is the weirdest we’ve ever had. There is no way anyone could have forecast it. It did not happen because the Fed was too tight. It did not happen because of a trade war. It was self-inflicted, caused by COVID shutdowns. And, in spite of a V-shaped bounce off the bottom – 33.1% annualized real growth in Q3, and likely 5%+ growth in Q4 – the economy is still smaller than it was a year ago.
Most big companies have not suffered financial damage, and clearly big tech has allowed much of the economy to operate virtually, but damage to small service industry businesses has been dramatic. What this means is that, while the economy will continue to heal, it will take years to fully recover. The pace of recovery will depend heavily on renewed shutdowns and the speed of a vaccine rollout. We watch high frequency data, including TSA checkpoint flow-through, OpenTable reservations, rail traffic, and gasoline usage. These weekly, or daily measures turned up in May, signaling a second half recovery. Now, they have leveled out, and in some cases slightly weakened.
This may mean some data weakness in the first quarter of 2021. But don’t let that scare you, we do not see a double dip. In fact, we anticipate solid 3.0% real growth for 2021. Three percent growth might not sound great, but it would be the first time growth has reached 3% for any calendar year since 2005. Nonetheless, any return to complete normalcy (getting the unemployment rate back down to under 4%) will take years. Because of reopening, the first waves of jobs came back fast. From the April peak of 14.7%, unemployment has fallen to 6.7% in November. And even with our robust forecast of 6.3 million new jobs in 2021, the unemployment rate will still only fall to about 5% by the end of next year. At that rate, total jobs will still be below where they were in February 2020, before shutdowns began.
Part of this recovery has been artificial. Demand has remained robust because the Federal Reserve is monetizing stimulus the government has provided. That stimulus simply borrowed from the future to hold up spending now. This is already leading to imbalances in demand versus supply and, combined with 25% year-over-year growth in the M2, has pushed consumer and producer price indices higher. Too much money chasing too few goods (and services) is a natural recipe for higher inflation.
In terms of interest rates, the Fed is dead set on leaving short-term rates near zero for all of 2021, and we doubt inflation rising modestly above its 2.0% target will change its mind. After all, the Fed has already said it wants to see inflation exceed that target for a prolonged period before it raises rates. Higher inflation might get the Fed to start thinking about ending quantitative easing, but lifting short-term rates is an issue for 2022 and beyond, not 2021.
Long-term interest rates, however, should drift higher as investors get more confident about the economic recovery and see higher inflation. Expect the 10-year yield to finish about 1.40% next year. Yields could move even higher, but the low level of short-term rates, the Fed’s commitment to keep short-rates low, and investor skepticism about how long higher inflation will last should keep long-term rates from soaring.
One segment of the economy deserves special attention, and that’s home building. The US was building too few homes for the past decade before COVID-19, and now the demand for residential real estate is even higher. Expect the surge in construction – and prices for single-family homes – to continue, as people seek more living space and life in places that provide adequate police protection.
In the next several weeks, news headlines may be filled with dire stories. But there is light at the end of the COVID-19 tunnel, and 2021 is likely to be a much better year than 2020.
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 12/7/2020 This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
Fundamentals of Behavioral Finance: Loss Aversion Bias
What is Loss Aversion Bias?
Loss aversion is the tendency to avoid losses over achieving equivalent gains. Broadly speaking, people feel pain from losses much more acutely than they feel pleasure from gains of the same size. Loss aversion bias typically shows up in financial decisions: people often need an extra—and sometimes significant—incentive to take financial risks that might result in a loss.
Nobel Prize-winning economist Daniel Kahneman illustrated how this plays out in a simple experiment he conducted with his students: he told them that if a flipped coin lands on tails, they’d lose $10. Then he asked them how much they would need to win to make the coin flip worth the risk of losing $10. The answer, he said, was typically more than $20.
Why does it matter?
Loss aversion can result in avoiding risk, leading to overly conservative portfolios that don’t deliver the returns needed to achieve long-term financial goals. It can also push you to sell during a stock market downturn simply to avoid further losses—which could mean missing out on gains when the stocks rebound. Conversely, loss aversion can lead one to hold on to investments that have declined in value to avoid realizing a loss in a portfolio, even when selling is the prudent decision. Loss aversion is a major reason why so many investors underperform the market. For example, in 2018, a year that saw two sizable market corrections, the average investor lost twice as much as the S&P 500 Index (according to the financial research company DALBAR). This disparity can largely be attributed to investors selling stocks out of fear of further losses, and consequently missing out on market rebounds.
What can you do about it?
Loss aversion is rooted in a deep-seated instinctual impulse to avoid pain. Making decisions before market volatility has a chance to play on your emotions can help keep us from making emotionally charged decisions. Our goal when making investment decisions for your accounts is to set up guidelines and objective rules for buying, selling, and rebalancing, particularly when facing difficult market conditions that require a more systematic approach. Additionally, consider going on a media diet. The financial media tends to focus on dramatic short-term ups and downs in the market rather than longer-term performance trends. Staying clear of the financial news can help keep you from experiencing the fear that can lead to making harmful short-term decisions.
“All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.”
“Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.”
“The S&P 500 is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.”
Information is provided by Eric Ford and Steve Ford and written by Charles Schwab, a non-affiliate of Cetera Advisor Networks LLC.”
Warm Welcome to Bryan Donaugh
Senior Relationship Manager, Registered Administrative Assistant
We are excited to introduce and welcome Bryan to our WealthCare Partners team. Bryan joined the firm at the end of September as a Senior Relationship Manager. Bryan will be working closely with Eric as his ‘right hand man’, sitting in on client meetings, helping with planning and client engagement.
Bryan grew up in central Ohio and attended Indiana Wesleyan University. He is an avid Ohio State fan – Go Bucks! He graduated Cum Laude with a degree in pastoral ministries. After college, Bryan moved to Indiana and started out in pastoral ministry, then made a career change to financial services in 2014.
He started out as an independent financial advisor and then headed to work for a Fortune 500 company. He primarily focused on working with Indiana school teachers and their school retirement plans. He currently holds the Series 7 and 66 registrations and is licensed in life, health, variable insurance, and long-term care insurance.
Bryan and his amazing wife Ashley married in 2006. In December of 2014, they welcomed their son, Titus and in June 2018 they welcomed their second son, Malachi. Bryan serves regularly at his local congregation, Northview Church, and enjoys coaching his sons’ sports.
Did You Know:
NOT A GREAT RETURN
– An American male retiring at age 65 in 2020 who has earned the maximum taxable wage for Social Security taxes every year during his working career ($137,700 in 2020) is projected to have paid $741,000 (stated as a 2020 present value number) in lifetime Social Security taxes but is projected to receive just $533,000 (stated as a 2020 present value number) in lifetime benefits (source: Tax Policy Center).
SMALL GUYS/GALS RULE
– Small American businesses, defined as having less than 500 employees, are responsible for 44% of US economic activity (source: US Small Business Administration – Office of Advocacy).
“Cast all your anxiety on him because he cares for you.” – 1 Peter 5:7
“Do not wait until the conditions are perfect to begin. Beginning makes the conditions perfect.” – Alan Cohen