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October 2, 2020 – President Trump and First Lady Melania test positive for Covid-19. Stimulus package negotiations continue. The labor market continues its slow recovery while the values of homes and financial assets like stocks and bonds have rebounded strongly. The long-term consequences of the government stimulus and extraordinarily low interest rates remain unclear.

//  by Tower Bridge Advisors

Stock market futures are trading lower this morning on news that President Trump tested positive for Covid-19 shortly after news that his senior counselor Hope Hicks tested positive on Thursday. This news is likely to renew fears about the second wave and the virus’ continued impact on the economy. If Trump becomes very ill, there is a possibility that Vice President Pence could assume power. The positive test comes barely a month before the election and will disrupt the President’s campaign schedule, possibly even future debates.

The House Democrats passed a $2.2 trillion stimulus package that has no chance of becoming law because it lacks support in the Senate. Negotiations between Speaker Pelosi and Treasury Secretary Mnuchin continue, but there are material differences in priorities and the amount of the package. Some argue that it is politically better for Democrats if negotiations fail. However, polls suggest both parties equally garner blame for the lack of progress. Without an additional stimulus package, economists and Fed officials agree that additional job losses will follow and consumer spending will deteriorate.

The September jobs report which was released this morning showed that only 661,000 jobs were added last month, which was well below the 800,000 figure that was estimated. The unemployment rate was 7.9% as compared to the 8.2% projection. No matter how you slice it, the economy continues to struggle, as only about half of the roughly 22 million job losses suffered during March and April have been recovered through September. Going forward, new weekly unemployment claims remain stubbornly high at nearly 4 times the pre-Covid rate of approximately 200,000.

Despite the ongoing labor market turmoil, investors and homeowners have not suffered the devastating effects that were initially feared as the pandemic erupted. Major stock market averages are positive for the year and national home price indices are up 4-5%, aided by low mortgage rates. A massive Federal response that included exotic fiscal and monetary actions is largely responsible for the swift recovery in asset prices.

However, we don’t know what the long-term consequences of this Federal response will be. A short-term consequence of these actions is a deficit that is projected to hit $3.7 trillion, due to a combination of increased government spending and reduced revenues. Moreover, the Federal Reserve’s balance sheet increased by approximately 70% to $7.1 trillion in the span of 3 months. Economists predict that the central bank’s balance sheet will hit $8 to $11 trillion, or nearly 50% of GDP, based on the current programs. In fact, Federal spending will exceed 220% of government revenues this year for the first time since 1932, during the Great Depression. The primary difference this time is that increased spending is exploding the ratio of “spending to revenues,” rather than the 53% decline in tax receipts, as was the case during the Great Depression.

The actual amount of debt that the government can sustainably maintain is a function of interest rates and economic growth. As long as economic growth exceeds the inflation-adjusted cost of the debt (i.e. interest rate), the government maintains higher debt levels by continually rolling over maturing debt. The obvious concern with this is that interest rates can rise, and if the total debt burden is too high, the math doesn’t work.

In the meantime, declining interest rates are driving asset prices higher, particularly in certain categories. In fact, the outperformance of growth stocks as compared to value stocks is a clear example of this force at work. Future streams of fast-growing cash flows are worth more in today’s dollars when interest rates decline as compared to higher amounts of cash flows today with slower growth rates. At the company level, changes in interest rates cause only minor changes in terms of current earnings (except for banks or other highly-leveraged firms). But the valuation of companies can change substantially as a result of the Fed’s interest rate policy stance. Thus, the Fed has become a key determiner of winners and losers in the stock market.

As Jim Meyer often notes, interest rates and earnings are what determine stock prices in the end. The Fed has indicated that low interest rates will likely remain low for years, given the extended time that will be necessary to recover the bulk of job losses from the pandemic. While the election and subsequent changes in fiscal priorities will take center stage in coming months, we can’t lose sight of the fact that good companies will find a way to manage through. And, while we think the market recovery may be extended, we don’t expect volatility to go away. Thus, being patient and targeting high-quality businesses to purchase during market declines remains the best course for long-term investors.

Today Kelly Ripa turns 50 while Singer Sting is 69.

Chris Gildea, 610-260-2235

Additional information is available upon request.

# – This security is owned by the author of this report or accounts under his management at Tower Bridge Advisors.

Additional information on companies in this report is available on request. This report is not a complete analysis of every material fact representing company, industry or security mentioned herein. This firm or its officers, stockholders, employees and clients, in the normal course of business, may have or acquire a position including options, if any, in the securities mentioned. This communication shall not be deemed to constitute an offer, or solicitation on our part with respect to the sale or purchase of any securities. The information above has been obtained from sources believed reliable, but is not necessarily complete and is not guaranteed. This report is prepared for general information only. It does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed in this report and should understand that statements regarding future prospects may not be realized. Opinions are subject to change without notice.

Filed Under: Market Commentary

Previous Post: «Tower Bridge Advisors, Wealth Management, Market Outlook, COVID-19 impact on economy, Economic Update, Fed’s low interest rate policy, Economic Recovery, Inflation, Rising government debt, Pandemic accelerating existing market trends September 2020 Economic Update: Can There Ever Be Too Much Money?
Next Post: October 21, 2020 – Stimulus talks continue past Speaker Pelosi’s deadline. They are likely to reach agreement but not gain Congressional approval until after the election. After tomorrow’s debate, most voters will have made up their minds. Today, we outline how we see five different outcomes affecting the markets going forward. »

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  • January 15, 2021 – Cyclicals powered higher yesterday, led again by Energy stocks. Big-cap tech continues to underwhelm in the near-term, digesting massive gains seen over the past several years. Today, stocks digest Joe Biden’s American Rescue Plan and a slew of bank earnings.
  • January 13, 2021 – The stock market is set up for a collision of rising earnings and rising interest rates. The latter, if they occur, will reflect higher inflation expectations. While the Fed is doing what it can to seed inflation, so far it is muted. For four decades, waiting for inflation has been akin to waiting for Godot. We will see if this time is different.
  • January 11, 2021 – Despite the historic events of last week, stocks continued to rise. Earnings and interest rates, not political theatre, are the driver of stock prices. The outlook continues to be favorable as long as real rates remain distinctly negative.
  • January 8, 2021 – New all-time highs everywhere. A new richest man in the world. Interest rates and banks finally breaking out. Crypto is running like a freight train. More IPO’s are coming. Is this 1996 or 1999?
  • January 6, 2021 – While the Georgia election results are not final, they will probably lead to a flip in Senate leadership to the Democrats. While some fear huge tax increases, a 50-50 split makes that highly unlikely. If anything gets done, it will be accomplished by a centrist coalition, not via strict party-line votes. In the meantime, rising yields align with optimism that the economy can accelerate as well as a rotation toward cyclicals in the stock market.
  • January 4, 2021 -A waning virus, together with an improving economy, set a good backdrop early in 2021. The risks are that investors become too euphoric or that inflation arrives sooner rather than later. The former is always a concern. The latter is unlikely to be evident for at least several more months, if not years.
  • December 30, 2020 – As 2020 winds down, next year’s outlook is all about where inflation expectations will be a year from now. With a one-year time horizon, it is harder to predict rates than earnings. I assume the pandemic is a bad memory by then. Imbalances in supply and demand need to be sorted out. How that happens will dictate rates and how the stock market will perform in 2021.
  • December 28, 2020 – With the signing of the spending and Covid-19 relief bill now complete, this should be a quiet week, void of much in the way of news, barring a shock from out of the blue. While the benefits of the relief bill won’t be reflected in December data that we will see next week, the direction of least resistance remains higher.
  • December 2020 Economic Update – “2021 – Growth vs. Inflation”
  • December 21, 2020 – When stocks decline on apparent good news, that’s a sign to pay attention. Last week, the Fed stayed very dovish and said rates would stay ultra-low as far ahead as one could see. Over the weekend, Congress agreed on an additional $900 billion in stimulus relief. But markets appear headed sharply lower this morning. A new viral strain is given as the reason but “sell on the news” might be a better explanation.

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