If you are like most people we know, you are very glad to be reaching the end of this year. During the past year we have experienced a global pandemic, massive social unrest, a contentious political atmosphere, an economic recession, the largest quarterly drop in GDP in history, and an end to the longest running bull market in American history. While there is no guarantee that things will be better in the upcoming year, sometimes the expectation of better times, along with an effective vaccine against Covid, can lead to better outcomes. The U.S. stock market defied the carnage of 2020 by rebounding after the lockdown, helped by the largest post-election rally since 1932. Bonds also posted gains as interest rates plummeted due to severe economic contraction. It was a very strange year indeed.
The U.S. economy has been on a wild ride this year. GDP dropped at an annual rate of 5.0% during the first quarter and an additional 31.4% in the second quarter. As the economy rebounded the second half of the year, GDP rose at an annual rate of 33.1% during the third quarter and is estimated to have risen 4.0% in the fourth quarter. For the entire year of 2020, GDP is estimated to have contracted somewhere between 3.5%-4.0%. Estimates for GDP growth in 2021 range from 3.5% to 6.5% as the economy continues to improve. The recovery in new jobs has stalled as the year has gone on but has improved markedly from the second quarter.
Making projections for 2021 depends largely on how quickly everyone can get vaccinated. Estimates are now calling for this to happen by mid-summer. If the experts are correct and the pandemic’s worst days are still ahead of us, we could easily see more economic and market damage during the first half of 2021 before things improve later in the year. The next twelve months will definitely see shifts in consumer confidence as the pandemic gets worse and then hopefully improves.
Something that has been lost in the Covid shuffle this year was a shift in the mandate of the Federal Reserve. Since 1977, the Fed’s mandate has been price stability, or keeping inflation low. Their new mandate is to target average inflation as well as achieving maximum employment. If not for the pandemic, this would have likely been much bigger news. As of right now, it is not clear what “maximum employment” means, but it does appear that the Fed is now open to higher levels of inflation. This is probably a result of years of very low interest rates and increasing levels of debt. Higher inflation helps with both of these issues.
This has been a very challenging year and we are optimistic that the New Year will bring better times for all of us. However, we are realistic enough to know that not everything goes according to plan and there will be hurdles to overcome. Economic conditions in the U.S. and around the world are improving but are worse than they were a year ago. There is much work to be done before we get back to a “new normal”. If you would like a copy of our updated Form ADV, please go to our website or give us a call. Stay safe.