2020 has proven to be an extraordinary year. We hope and pray you and yours are staying safe. As the pandemic progressed, we heard from several clients and loved ones of people who have been directly affected by Covid-19. Our prayers are with those of you who have been directly affected by tragedy associated with the pandemic. If there is any way our office can help you or your family during this time, please do not hesitate to reach out.
Covid-19 and the national election have dominated the news and the markets throughout this year. Over the last couple of weeks, the markets have begun to see some resolution of these issues. While the outcome of either issue isn’t fully known at this point, the market seems to be looking ahead to a divided government (depending on the outcome of Senate runoff in Georgia) and encouraging news about a vaccine from both Pfizer and Moderna.
The pandemic and its effect on our economy seems to be a much more important factor in the direction of the markets than the election results. We continue to believe that when the general public feels confident and safe to begin to travel and go out in public without precautions such as masks and social distancing we will see tremendous economic growth. It now appears that there will be at least one viable vaccine within the next several weeks. With the government stimulus that has come into the economy since March of this year and with the economic shut down this past spring, the deferred demand in our economy is tremendous and should lead to dramatic economic growth once confidence is restored.
This deferred or “pent up” demand is best seen in several of the following charts:
The above chart[i] shows a dramatic increase in Money Market Funds during the second quarter of this year. In fact, money market funds increased by over 2 Trillion dollars in just over 3 months this year. Money market funds are almost twice as much as they were at the height of the “great recession” in 2008.
The following chart[ii] shows you how all this money made it into money market accounts. The savings rate in our country jumped to over 30% during the shut-down. This is the combination of not being able to go out and spend money and the fact that the government stimulus was coming by the trillions of dollars during this same time.
This last chart[iii] is of the M2 Money Supply. M2 Money Supply is the measure of liquid resources in the economy such as cash, checking deposits, savings deposits, money market securities, mutual funds, and other time deposits. As you can see, M2 Money Supply has grown by almost $3 Trillion dollars since the first of April of this year. This chart tracks M2 Money Supply since the fourth quarter of 2009 and it has been in a slow and steady increase… until the recent spike.
After looking at all of this information we conclude that when the pandemic is “over” there could be significant economic growth. This potential boom seems to be a much more significant factor in the direction of the markets than the possible tax increases that may come from a Biden presidency. We will consider the pandemic over when there is an effective vaccine or cure for Covid-19. Until then our economy will coast along in a stalled mode. Meanwhile the stock market is anticipating the end of the pandemic, which we believe explains the significant rebound we have seen over the last few months.
Even throughout these very turbulent times your portfolio has performed well. The equity portion of your portfolios that we help manage have dramatically outperformed the benchmarks due to our decision to overweight large cap growth during the last 18 months. Now that the market appears ready to price in the end of this historic pandemic we believe we should rebalance the equities in the portfolio back towards a more balanced alignment. We will still be overweight large cap growth but not to the extent we have throughout this year. This means we will be taking profits in some of the equity funds and adding to our position in other equity funds. You will begin to see these changes over the next few days.
We certainly hope you and your family are remaining healthy and safe. Should you have any questions or comments please do not hesitate to contact us any time.
[i] Federal Reserve Chart Money Market funds
[ii] Federal Reserve Chart Personal Savings Rate
[iii] www.stockcharts.com M2 Money supply