By GARY K. LISKA | Special to the Palisadian-Post
The year in brief: The coronavirus pandemic disrupted the global economy, global financial markets and daily life in 2020.
For investors, it was certainly an eventful year. Economic activity abruptly contracted in the spring, and stocks quickly fell. The Federal Reserve cut short-term interest rates to just above zero as the pandemic took hold and adjusted its monetary policy stance, announcing it would tolerate higher inflation for an extended period.
U.S. households received one economic stimulus payment from the federal government and might yet receive another. The U.S. and China reached a partial trade deal. The United Kingdom and the European Union made little progress toward a post-Brexit trade pact. In real estate, a seller’s market remained firmly in place.
The U.S. economy: The coronavirus delivered a hard blow to economic norms. Stay-at-home and safer-at-home orders resulted in the near-shutdown of entire industries in March and April. Consumers bought staples eagerly, but discretionary spending dried up, resulting in a record dip in gross domestic product: GDP fell 31.4% in the second quarter.
But the economy expanded at a 33.1% annual rate in the third quarter, recouping much of the pandemic-induced contraction suffered earlier in the year.
So how do the other key fundamental indicators look now, compared to last fall? By the Department of Labor’s estimation, unemployment stood at 7.9% in October while the jobless rate was 3.6%. Inflation remains low: Through October, the Consumer Price Index was up 1.4% year-over-year. Consumer spending rose 1.4% in September, following a 1% gain in August.
A look at existing home sales numbers two-thirds of the way into 2020 shows the seller clearly in charge. National Association of Realtors data shows that homebuying trended higher since May 2020, even as the median price for an existing home reached a record $311,800 in October; existing home sales in October were up 9.4% from a year earlier. New home sales, incidentally, also trended higher through October.
The Federal Reserve relaxed its longstanding 2% inflation target. For decades, the central bank has had a twin mandate to promote maximum employment and price stability (i.e., controlled inflation). Managing inflation has often been the top priority. In late August, the Fed said that it was ready to let inflation reach and exceed 2% overtime in pursuit of “a robust job market.”
Two trade deals involving the U.S. also became law. President Donald Trump and Chinese Vice Premier Liu He signed off on a partial U.S.-China trade pact in January, cooling the 2018-19 tariff dispute between the world’s two largest economies.
President Trump also signed the United States Mexico Canada Agreement (USMCA) in January, a renegotiation of the North American Free Trade Agreement (NAFTA), which went into effect on July 1.
The global economy: In its October 2020 forecast, the International Monetary Fund estimates global GDP shrinking 4.4% this year and U.S. GDP retreating 5.8%.
The IMF’s 2021 outlook is much better. In sum, it sees the world’s economies expanding 5.2%, with GDP growth of 3.9% for the U.S., 5.2% for the European area and 8.2% for China.
China’s economy bounced back from the nation’s winter and spring lockdowns, expanding at a 4.9% pace in Q3 by official estimates (if that pace holds, China’s economy could account for roughly one-third of the world’s economic expansion this year).
Ill winds kicked up this fall between the European Union and the United Kingdom. Prime Minister Boris Johnson had established October 15 as a deadline for the U.K. to forge a post-Brexit trade agreement with the E.U., but talks stalled. Heading into November, it appeared uncertain that a deal would be in place for 2021, and that kind of outcome could rile European financial markets.
A peek at global stock benchmarks shows few notable year-to-date gains. Argentina’s Merval was up more than 19% for the year through late October; China’s Shanghai Composite had advanced about 9% and South Korea’s Kospi about 8%.
Several other indices, though, were down 10% or more: Hong Kong’s Hang Seng, Mexico’s Bolsa, Brazil’s Bovespa, France’s CAC 40 and Spain’s IBEX 35. MSCI’s EAFE index, a longtime benchmark for major international equity markets, was down more than 7% YTD.
Looking back, looking forward: Investors are waiting for resolution on some of the major stories of this fall and winter. Then there are questions for 2021. To what degree will the pandemic continue to shape trends in consumer spending? If economic indicators disappoint, will the Fed step up its asset-buying?
Here is what we know. We have ultra-low short-term interest rates in place, with the federal government investing in the economy. It will take time for businesses and consumers to regain the confidence that they had prior to the pandemic.
Prognostications and historical data are interesting but may have little or no bearing on what is ahead. With so many questions for Wall Street to consider, the end of 2020 may see a good deal of volatility.
If the next couple of months do bring ups and downs, many investors may react, but other investors may take them with the patience and perspective that comes with experience.
I wish you the very best this holiday season, and good health, success and prosperity in 2021.
Gary K. Liska may be reached at 310-712-2323 or seia.com.
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