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We’re not going back to the same economy

An unprecedented event, the pandemic has created havoc with global economies, including the United States. It has transformed how people work, travel, eat, shop and congregate. The pandemic has clearly changed the way we live. It has changed how students are educated, how people communicate, how households are entertained, how business is conducted, and which industries, geographic areas and categories of people will survive and thrive, and which will suffer and decline.

The economic recovery was shaped in large part by the 2007-09 recession. This time, faced with a bigger and quicker economic shock, the government response rolled out in weeks—handing more people unemployment benefits and one-time stimulus checks. Many Americans have paid down credit-card debt and saved more. Their household net worth jumped, aided by the surge in the stock market and the housing market. Yet those encouraging statistics mask an increasingly unequal economy. Millions are out of work and facing permanent job losses. More people are going hungry. Hundreds of thousands of small-business owners have closed shop. The National Restaurant Association estimates that one in six U.S. restaurants — more than 100,000 — have closed.

Even after vaccines have conquered the virus, economies have restored their health, and jobless people have found work again, the economic landscape will almost surely look different.

The pandemic forced Americans to collectively swap the physical for the digital world in a matter of months. As retailers learn to operate without stores, business travelers without airplanes, rental cars and hotels, and workers without offices, much of what started out as a temporary expedient is likely to become permanent. Businesses are now spending less on office space and travel and more on cloud computing, collaboration software and logistics. Any long-term decline in business travel would have far-reaching consequences — for corporations as well as for the airlines, hotels and restaurants that cater to them. Business travel accounts for more than a fifth of global spending on travel and tourism. The decline in traditional retailing, coupled with the rise in people working at home, carries ominous implications for commercial real estate too. Demand for office and retail space throughout downtowns is likely to stay weak.

At the very least, the crisis accelerated trends that were already well underway:

  • A shift away from physical stores toward e-commerce.

  • The flexibility of working from home.

  • The streaming of movies rather than theater-going.

  • Take-out and meal deliveries or home cooking instead of in-restaurant dining.

  • Videoconferencing replacing much business travel.

  • Companies turning to diverse, regional supplier networks.

  • Fintech companies taking business from traditional banks.

  • Digital transactions replacing cash.

“We’re not going back to the same economy,” Federal Reserve Chair Jerome Powell told a European Central Bank forum last month. “We’re recovering, but to a different economy.” Of course, the world is always changing, prodded by demographics and technology. Witness the fact that none of the original Dow Industrial components are still in the average. 

Among other things accelerated by Covid-19, and the subsequent responses, were stock prices. Low interest rates elevated P/E ratios, leading to higher prices. The quickest bear market in history was followed by the quickest recovery to new highs. Thanks to the largesse of central banks and Congress, there is excess money sloshing around and that is feeding euphoria. 

So, we say goodbye and good riddance to 2020. We will look to 2021 with optimism.  As the year progresses, markets will tell investors whether that optimism is justified. The first big moment will come this week when the market learns who controls the Senate. As the graphs below indicate, the stock market has had positive calendar year returns over 77% of the time despite having intra-year declines of at least 10% almost each year.

We wish you a Happy, Healthy, pandemic-free New Year – one filled with peace, joy and prosperity.

The LVM Team

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