Updated: Nov 16, 2020
SUMMARY. As we outlined in the past, the extent we see economic growth going into 2021 will be greatly dependent on election results, fiscal policy and policy overall. Our base case is a Biden win and Senate GOP control. Covid-19 in 2021, in our view, will play only a minor role other than affecting the pace of reopening which by and large will be dictated by vaccine (largely imminent), availability less so elections (we do admit under Biden risks to re-closer is higher delaying reopening).
Under a Biden administration, even with a Senate in GOP control, fiscal spending is likely to increase considerably which may tend to stoke inflation and pressure long-term interest rates. Further, tax and regulations may greatly increase although not to extent GOP loses control of Senate. We do not concur with economic pun-dents dismissing the above as not greatly impacting growth. In fact, what's not discussed is these predictions, is what the election turmoil will do to consumer confidence going forward and spending. Regulation & tax uncertainty may pressure growth expectations and confidence further pressuring overall growth. Relaxed trade policy reminiscent under Obama, may add to slower growth as well as offshoring jobs & manufacturing may resume. Lastly, immigration policy, may profoundly negatively impact wage growth and increase fiscal spending. Without going deeper, as its more complex than this, the net effect on growth will be to dampen growth in 2021 and well beyond. Further, whether accurately measured, inflation may increase despite slower growth (the recent fall in the US dollar & higher long term rates are already evidence of that). In sum, we expect GDP growth to average 0-2% at best over the next 4 years with higher amounts initially tied to the Covid-19 recovery and fiscal spending. In some sense we expect what occured in Japan decades ago in their lost decade of growth with the twist of higher inflation. In one word STAGFLATION, many will think its recession even though stats say it's technically not.
INVESTMENT IMPACT. This week, in anticipation of a Biden win, we shifted assets out of higher end retail & restaurants and into retail names that target lower income households targeting clothing necessities. This is mostly tied to tax policy. We maintained exposure to financials tied to our theme of higher rates which may improve fundamentals in the sector. We added media exposure to de-risk from a slower economic recovery and added to our technology exposure in select names. Overall, models have a value bent with mostly dividend paying stocks many benefiting from higher inflation. Overall we expect a low return market environment overall for sometime to come, where stock selection maybe be increasingly important. Especially true, given high levels of debt, zero rates, unprecedented monetary support which may handcuff reaction to economic shocks. Lastly, markets starting near highs and valuations argue too for low overall market returns.
In short order we will synthesize these broad economic assumptions into our Investment Framework for 2021 which can found on our website.
Our model portfolio performance has been updated on our website as of 11/02/20.
For more insights see our website and disclosures found there at BCA. As always contact us for further explanation of how these events can affect your finances. To unsubscribe from our newsletters & website please email us with "unsubscribe" in the subject.