A Reflection on the State of the Economy Today & Tomorrow

To say that the first half of 2020 hasn’t gone according to plan would be a bit of an understatement. 

What began as a year full of promise, with markets setting new records almost immediately out of the gate, has turned into a once-in-a-lifetime event with repercussions that will be felt for years to come. As hard as it is to find anything good to say about this year, there are actually silver linings which bode well for the future of the economy, and society.

Very often people ask me how the stock markets can be doing so well, when the economy appears to be doing so poorly. This apparent disconnect leads people to often believe that the market is on a “sugar high,” and it erodes their faith in the markets. Not understanding why something is doesn’t make it untrue.

In simplest terms, because the markets are forward looking, they don’t very much care about whether data is good or bad, on the surface. Markets care about whether data is better or worse than expected. For example, when the unprecedented shutdowns began, panicked markets lost upwards of 30% very quickly, without any actual data justifying it. Markets had baked-in a reduction in corporate profits of 60-80% in anticipation of a prolonged shutdown – a worst-case scenario. That has set the bar extremely low. 

GDP figures for the second quarter are expected to be atrocious, with numbers from -35% to -50%.  The lower the bar, the easier it is to beat. Economies began reopening six weeks ago, businesses leveraged technological innovation and revamped their processes to continue producing, individuals shifted even more of their purchasing to the internet. It’s entirely possible that a seemingly catastrophic GDP number could send markets higher as long as it beats those very low expectations. You’ve already seen this happen with the last two big jobs reports.

With two consecutive quarters of negative growth, there are many out there who are eager say we are in a recession. While that may technically be true, the similarity ends at the technicality. Recessions happen when there is a systemic issue in the economy affecting growth. That is not the case here; what we are experiencing is entirely self-inflicted. Our economy was exceedingly strong before this event and that will help us power through the headwinds and, though it will take time, achieve new highs.

There are those out there who liken this experience to a natural disaster, and so they expect a recovery at the pace one might expect after a disaster. This is a deeply flawed comparison because natural disasters destroy capital. They require the rebuilding of factories, homes and infrastructure. This experience has left capital intact. 

Technology has been the saving grace of this event, as it has been in so many before it. Imagine forcing 300 million people to stay home in 1997, before Netflix, Amazon, Doordash, Instacart, and even texting. The ability to keep people home, productive, and entertained, while providing access to basic needs allowed the healthcare industry to build excess capacity and deal with the crisis. 

There have been two other unintended developments made possible by technology which will have lasting effects.

First, the need for businesses to retain employees, while keeping them productive has forced technological innovation in the way nearly every employee is able to do their job. If you haven’t been working from home, you have certainly placed a call to a call center only to find the voice on the other end of the line was sitting at their kitchen table. While I don’t think we’ll all be working from home forever, the technologies being developed to enable it will surely make the economy as a whole even more efficient in the way it uses resources and labor.

Second, this event has forced adoption of new technologies by a whole segment of the population not otherwise considered to be early adopters. 

Think of all of the older folks who have not been able to see their doctors for routine appointments, instead relying on telemedicine. While they may have been reluctant at first, they’ve now experienced the convenience of waiting for their doctor to join a video meeting from their kitchen table, as opposed to driving to an office and waiting an hour in a lobby just to be seen. 

This forced adoption means that this population is already going to be primed to more quickly accept whatever technologies come after telemedicine. The same is true in banking, mortgages, real estate, and endless other industries.

Where do we go from here? It’s very hard to say, since the majority of the damage done, economically speaking, is due to governmental response, another shutdown could dramatically curtail the rate of the recovery. While we think another full shutdown seems unlikely, it is possible. 

What we do know from experience is that 100% of times the US markets have experienced a pullback they have eventually recovered. That is certainly no guarantee, but it is a great track record.

We believe in the strength and diversity of the US economy to pull through in the long-run. That doesn’t mean that every sector will recover at the same rate, or even at all, but the economy as a whole should. You should continue to work very closely with your CFP® to help ensure that your plan stays updated, and your assets remain poised to capitalize on the areas of the economy that are leading the recovery.

Stephen Kyne, CFP® is a Partner at Sterling Manor Financial, LLC in Saratoga Springs and Rhinebeck.

Securities offered through Cadaret, Grant & Co., Inc. Member FINRA/SIPC. Advisory services offered through Sterling Manor Financial, LLC, or Cadaret, Grant & Co., Inc., SEC registered investment advisors. Sterling Manor Financial and Cadaret, Grant are separate entities. This article contains opinion and forward-looking statements which are subject to change. Consult your investment advisor regarding your own investment needs.