Wealth Management: Strategy blog – Gaps in the clouds?

Strategy team: Kevin Gardiner

It's been a difficult week. Covid contagion, trade tension, mixed data, downbeat central banks, toxic US politics, faltering stock prices, Brexit confusion. But we still see some gaps in the clouds. 

First, a couple of stories you may have missed – probably because the news factories didn't give them headlines. We've added our own:
  • Fed halves its estimate of 2020 US GDP decline: Overlooked amidst the FOMC's latest doveish guidance was its lowered estimate of the size of this year's slump, from 6.5% to 3.7% (OK, not quite a halving, but close). It also cut projected unemployment at year-end from 9.5% to 7.6%. This positive rethink followed a material upgrade to projected 2020 global GDP by the OECD; smaller upward revisions to projected eurozone growth at the ECB; and much bigger upward revisions to UK and global forecasts at the Bank of England in August. Still be a year to forget, of course – but perhaps not quite as grim as feared a few months back.
  • US poverty rate fell to a post-1959 low in 2019: It is still too high, but this fall accompanied a surge in real median household income, which a few years back was widely said to have largely stagnated since the 1970s. That was always a questionable picture, and the latest data show meaningful growth in "average" living standards over that lengthy period: pre-covid, the economy was doing a better job than its critics suggested. That said, let's hope the White House press office didn't notice either.
Meanwhile, a popular image for those projecting resumed economic collapse is that of Wile E Coyote: having run off the edge of a cliff, he is briefly suspended in mid-air before crashing to earth. The looming withdrawal of some fiscal support – furloughs, unemployment pay, subsidies – is said to be the cliff edge beyond which a debt-laden economy is doomed eventually to plunge into the dust.

It's a neat image, but we're not convinced. The cliff edge is not so sudden; the canyon floor is not so distant as it seemed, and may be rising to meet us; and the economy is miscast as a fall guy to begin with.
How do the confidently-gloomy pundits know that many furloughed and unemployed workers won't be re-employed? Economies have been rebounding since May, and while growth must fade and falter after the initial turnround – an unsustainable acceleration – there is no reason to expect it to cease, provided of course that wholesale lockdowns are not reintroduced.    

Growth is the norm – not because of monetary and fiscal policies (though they will overall remain very friendly, despite those partial withdrawals of support), but because of the ongoing background gains in productivity driven by technology and the learning curve.

You need a good reason to expect growth to be interrupted. Lockdowns provided one; but if current contagion remains less threatening, governments will resist their wholesale reintroduction.

Recovery is certainly uneven. Many businesses are still struggling. But as we noted in Market Perspective, some parts of the global economy have hit new highs. Overall, we have likely pushed back above the "halfway down" mark for global GDP. Even in the hard-hit UK, that level was regained in July – two months ago, before schools re-opened. A return to 2019 levels of global output is feasible in 2021. 

And if the stock market is running out of steam, it is doing so after a remarkable rebound. Looking across the valley was to be expected – but the market's gaze has occasionally seemed to be moving beyond the other side, and starting to size-up the next mountain range. Within the market, attempted outperformance by cyclical groups might further testify to economic momentum. But without a shift in interest rate expectations or a vaccine, such a rotation might be premature, even for us.


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