Zacks Investment Management

Bobby C. from Boise, ID asks: Good Morning Mitch, pretty much everything I’ve been reading points to a rough winter – for economics, the pandemic, and I think we can pretty much all agree politics. The question is, if the economy is set up for a rough road in the first few months of the year, shouldn’t that mean a rough road for markets as well?

Mitch’s Response:

Thanks for writing, Bobby. There is really no sugar coating how challenging the winter months could be, from a public health standpoint as you mention and certainly within the realm of ‘uncertainties.’

Just last week, data showed that jobless claims remain elevated with about 750,000 Americans applying for unemployment benefits each week, a number that has remained fairly steady since October. In December, U.S. employers shed 140,000 jobs, the first employment decline since April 2020. The services sector is also notably suffering, as the pandemic continues to restrict in-person economic activity. Current economic fundamentals are by no means rosy.¹

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But remember, the stock market does not really concern itself with in-the-moment or backward-looking data, in my view. The stock market is almost always looking forward, sometimes 6, 12, or even 18 months into the future. As an investor, I think it is paramount to look forward as well, and to think about what the economy will look like this fall, not this February.

There are a few key fundamentals I’ll point out that should hopefully give you a bit more optimism. First, we recently saw a new $900 billion fiscal stimulus package pass, which amounts to over 4% of total U.S. GDP. Many expected the package to be bigger, but with Democrats controlling the White House, Congress, and Senate, I think we can reasonably expect another round of fiscal stimulus in the not-too-distant future. Fiscal stimulus drives market support, in my view.

Second, it is sometimes assumed that the pandemic has crushed American households across the board. But in aggregate, American households are not struggling and dipping into savings—they are adding to savings. In fact, people who can work remote, spend less, invest in the stock market, and hold hard assets such as real estate have actually increased their net worth during this time. Just look at how the savings deposits have shot higher since the pandemic hit:

Source: Federal Reserve Bank of St. Louis³

Finally, the Federal Reserve has made it fairly clear that even if we experience inflationary pressure later this year, they are going to keep borrowing costs close to the zero bound. That creates a favorable environment for borrowers and investors, but not necessarily savers. As the old saying goes, “you can’t fight the Fed.”

At the end of the day, we cannot really know if this winter and spring will be volatile for markets, but for a long-term investor, that shouldn’t matter. In my view, long-term investors should be positioning for where the economy might go, not necessarily where it is today. And when I look out to the back half of the year and beyond, I see growth and accelerating earnings.

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Disclosure