Stocks versus the economy
For most of the year, there has been a disconnect between the financial markets and Main Street. Investors are wondering whether this will continue into the new year and if so, what will that mean for their portfolios.
Clearly, it has been a bull market for stocks and a bear market on Main Street. That makes some sense when you realize that the benchmark equity index in the U.S., the S&P 500 Index, only represents about 20% of America’s workforce.
Main Street and the economy continue to suffer. The present winter upsurge in the coronavirus cases and deaths, as I predicted, is impacting both employment and stalled economic growth and should continue to do so into next year. The only real way to lessen these hardships is through government spending. However, fiscal spending remains mired in political partisanship, while unemployment hovers around 10% of the workforce.
The latest wrinkle in the ongoing circus we call Washington is the last-minute involvement of our lame duck president. After little to no interest in anything but his election results for weeks, President Trump suddenly decided he did not like the compromise legislation forged by both parties over months in three different areas.
The stimulus package, the extension of the nation’s budget, and next year’s defense bill are now all on hold until Trump either signs the legislation, abstains, or vetoes the bills. Congress has the votes to override any presidential vetoes, but that will take days, even weeks. In the meantime, the government could shut down, Americans in need run out of unemployment insurance, and the military is left without funding. Delay is the last thing the economy needs right now, but the president is on an extended vacation in Florida.
The stock market, on the other hand, has been doing just fine, thanks to the easy monetary policies of the Federal Reserve Bank. We all understand that. However, the central bank can only do so much, and while they still have a few tricks in their bag, an economic recovery in 2021, and a continued gain in the stock market, in my opinion, will largely depend upon what a divided and partisan Congress can or cannot accomplish.
As such, the run-off elections in Georgia on January 5th will play a big part in what happens to Main Street and Wall Street in the coming first quarter of 2021. Most stock jockeys are expecting some kind of pullback in January. Why?
It is all about taxes. If the two Georgia Senate seats go to the Democrats, the chances of a tax increase on corporations and the wealthy in a Democratic-controlled Congress and presidency are higher. If the GOP takes one or both seats, investors believe the Senate will remain under Republican control and therefore nothing much will get done on the tax end. The markets will breathe a sigh of relief, but then what?
The chances of another spending program by the new Biden Administration just two months after this latest $900 billion bill (if passed) seems slim at best in a divided Congress. Without it, I expect to see another 2.5 million job losses by the end of March, and an economy that will take much longer to recover. Sure, the vaccines will help, but the medical experts warn us that the “herd immunity” that we all hope can turn the tide in this pandemic is still six months or more away.
As such, investors should prepare themselves for a volatile first quarter, depending upon an election that is too tight to call, the number of new coronavirus cases and the speed of vaccine distribution. None of which is quantifiable at this point. My short-term target for the S&P 500 Index remains 3,740 to 3,800.
Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or e-mail him at bill@schmicksretiredinvestor.com .Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.