Can Massive Deficits Really Be Financed?

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

January 25, 2021

The budget deficit for fiscal year 2020, which ended 9/30/2020, was $3.1 trillion, the highest ever on record in dollar terms, and the highest relative to GDP since World War II. This year the deficit will be even larger.

Before the bipartisan “stimulus” compromise passed in December, congressional budget scorekeepers estimated the fiscal year 2021 budget deficit at $1.8 trillion. Now, with that additional $900 billion in spending, and the Biden Administration promoting an additional $1.9 trillion stimulus early this year, we expect the budget deficit for FY21 to be at least $4.0 trillion.

Superficially, a $4.0 trillion budget gap doesn’t seem much different than last year’s deficit. But there is one key difference.

Last year, while the budget deficit was $3.1 trillion, the amount of debt held by the public increased $4.2 trillion, due to the effects of federal lending programs for students and small businesses.

But the Federal Reserve increased it holdings of Treasury securities by $2.3 trillion. As a result, buyers outside the Fed had to purchase $1.9 trillion in federal debt, which wasn’t substantially higher than $1.6 trillion they had to absorb back in 2009.

This year, with the Fed scheduled, according to its announcements, to buy $1.0 trillion in Treasury debt – the current pace is $80 billion a month – private buyers will have to absorb about $3.0 trillion in federal debt. This is substantially greater than last year and double the amount in 2009.

We are not trying to say the sky is about to fall. The world is awash in liquidity, much sovereign debt has negative yields, and the Fed may just increase its purchases of US Treasury debt.

Looking back over the past 20 years, there is no consistent relationship between a higher amount of debt issuance and higher interest rates. In addition, the interest cost of the federal debt is still very low by historical standards and private companies may dial back borrowing as many of them have plenty of cash already after a year of extremely low interest rates.

But…and this is a big but…the US is moving into uncharted territory by increasing debt this rapidly. Last year, the Fed absorbed a large part of the increase in debt. This year, it looks like the Fed will absorb a much smaller share, which means the Treasury has to find many more buyers.

This attempt at following Modern Monetary Theory – a belief that a country can print and spend at will – has never worked before. It always ends up with significantly bad outcomes, which include devaluation and inflation.

However, these are likely longer-term problems. In the short-term this second year of fiscal profligacy will not cause serious problems for the economy. Moreover, we hope that the surge in deficits is followed by some measures that control spending growth beyond the COVID19 emergency and the immediate economic recovery.

We do expect the 10-year Treasury yield to rise to around 1.5% by year end and then expect it to rise more in future years as inflation picks up. It is spending, not deficits themselves, that truly impact the economy. However, the idea that we can spend and borrow like this indefinitely, with no consequences, will only lead to ruin.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

1-27 / 7:30 am Durable Goods – Dec +1.0% +1.0% +1.0%

7:30 am Durable Goods (Ex-Trans) – Dec +0.5% +0.3% +0.4%

1-28 / 7:30 am Initial Claims – Jan 25 880K 870K 900K

7:30 am Q4 GDP Advance Report 4.2% 5.2% 33.4%

7:30 am Q4 GDP Chain Price Index 2.2% 1.9% 3.5%

9:00 am New Home Sales – Dec 0.860 Mil 0.941 Mil 0.841 Mil

1-29 / 7:30 am Personal Income – Dec +0.1% +0.1% -1.1%

7:30 am Personal Spending – Dec -0.4% -0.3% -0.4%

8:45 am Chicago PMI – Jan 58.0 60.1 58.7

9:00 am U. Mich Consumer Sentiment- Jan 79.2 80.0 79.2

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Growth Continued in Q4

Monday Morning Outlook

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 1/19/2021

The double-dip recession so many feared didn't arrive in the fourth quarter of 2020, and it certainly doesn't look like it will happen in early 2021, either.

It's true that renewed shutdowns starting last November finally hit retail sales and employment, especially at restaurants and bars. But much of the economy, like manufacturing output and housing, kept growing in the fourth quarter. As a result, even though the latest "stimulus" bill didn't pass until December, that "stimulus" will now lift the economy in the first quarter when it really needs it.

But don't let that fool you, this growth is "borrowed" from the future. The underlying economy – the part not lifted by deficit spending, is hurting. Nonetheless, and regardless of our view of long-term economic issues because of this massive spending, Congress and President Biden are likely to pass even more spending in the months ahead.

When we combine even more spending with vaccines and warmer weather, the US economy should keep growing. We expect real GDP to grow 4.0% in 2021 (Q4/Q4) while payrolls expand by six million. Whether that much growth in jobs is good or not depends on the eye of the beholder. It would be the largest single calendar-year increase ever in the number of jobs and the fastest percentage gain since the 1970s. But it would also leave us more than two million payrolls short of where we were prior to COVID-19. Progress, yes; a complete recovery, no.

For the actual numbers, we estimate that real GDP grew at a 5.2% annual rate in the fourth quarter, which may change slightly based on reports during the next two weeks, but probably not much. That's a great number, but please remember that it still leaves real GDP 2.2% below where it was a year ago. The damage to small businesses is real and will take years to heal. Here's how we calculate the 5.2% growth in real GDP for Q4:

Consumption: Car and light truck sales rose at a 20.9% annual rate in Q4, while "real" (inflation-adjusted) retail sales outside the auto sector declined at a 2.6% annual rate. We only have reports on spending on services through November, not December, but it looks like real services spending should be up for the quarter. As a result, we estimate that real consumer spending on goods and services, combined, increased at a 3.2% annual rate, adding 2.2 points to the real GDP growth rate (3.2 times the consumption share of GDP, which is 68%, equals 2.2).

Business Investment: Business investment in equipment continued to rebound sharply in Q4, while investment in intellectual property likely grew at a more moderate pace. However, commercial construction likely continued to shrink in Q4, although at a slower pace than earlier in 2020. Commercial construction is often a lagging indicator of economic performance, and so it shouldn't be a surprise that this sector continues to be under pressure, particularly given the devastation wrought by COVID-19 on office space, retail businesses, movie theaters, and hotels. Combined, business investment looks like it grew at a 15.2% annual rate, which would add 2.0 points to real GDP growth. (15.2 times the 13% business investment share of GDP equals 2.0).

Home Building: Residential construction continued to grow rapidly in Q4, likely hitting the highest level since 2007. We believe home building has much further to grow given the shortage of homes in many places around the country and the higher appetite for houses with more space in the suburbs. We estimate growth at a 32% annual rate in Q4, which would add 1.3 points to the real GDP growth. (32 times the 4% residential construction share of GDP equals 1.3).

Government: It's hard to translate growth in overall government spending into a GDP effect because when calculating GDP only direct government purchases of goods and services counts, not transfer payments like extra unemployment insurance benefits. We estimate federal purchases grew at a 1.0% annual rate in Q4, which would add 0.2 points to real GDP growth. (1 times the 18% government purchase share of GDP equals 0.2).

Trade: More economic growth in the fourth quarter brought a larger trade deficit (at least through November) as well, as imports and exports both grew, but imports grew faster. At present, we're projecting that net exports will subtract 1.3 points from real GDP growth in Q4.

Inventories: Inventories look like they grew in Q4 for the first time since 2019. And, given the prolonged contraction in inventories, they are poised to make a notable contribution to economic growth in 2021, as businesses have plenty of room to restock shelves and showrooms. We are estimating that inventories add 0.8 points to the real GDP growth rate for Q4.

Add it all up, and we get 5.2% annualized real GDP growth for the fourth quarter. That's very high by historical standards, but the economy has much further to go to reach a full recovery.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Keeping Good State Policies

First Trust Monday Morning Outlook
Brian S. Wesbury, Chief Economist
January 4, 2021

When it comes to attracting people, jobs, and businesses, some states are just better than others. While the total US population increased 6.5% from 2010 to 2020, it increased 17.1% in Utah, 16.3% in Texas, 16.3% in Idaho, 16.1% in Nevada, 15.8% in Arizona, and 15.3% in Florida. Meanwhile, state populations declined in West Virginia, Illinois, New York, Connecticut, and Vermont, with very slow population growth elsewhere in the Northeast and Midwest.

At least three major tech companies are in the process of moving their headquarters from California to Texas; financial firms are moving operations from New York to Tennessee and Florida. Workers and businesses are voting with their feet.

This migration towards greener pastures has some worried. Why? The concern is that people leaving high-tax, less competitive states with the kinds of anti-growth government policies that have already driven businesses and workers away will bring to their new states the attitudes and voting habits that made their old states worse for business in the first place. Bad policy is bad policy, regardless of the zip code, let's not make the same mistakes in a new place.

Here's a game plan for states that have attracted so many newcomers to stave off the importation of bad policy. Ideas to keep these vibrant states vibrant.

First, states should refrain from adopting new tax systems layered on top of old ones, in particular introducing an income tax. It's simple, really: the more ways a state has to raise revenue, the larger the share of the state's economy the government will take. If a state doesn't yet have an income tax, the best option is to enshrine that status in the state Constitution.

Second, states should replace any defined-benefit plans for government workers with defined-contribution plans (401Ks). Traditional defined benefit plans provide disproportionate benefits to workers who remain at the same job the longest, even if they're no more productive than younger workers (and often less). A defined contribution system would incentivize less tenure with the government, which would help prevent the government from having workers with a built-in interest in simply growing the size of government.

Third, replace as much of the public school system as possible with a broad system of education vouchers, which families can use to choose schools for their children. Putting families, not government, in control of education tax dollars will reduce the impact of the education system on future voters and help realign power from bureaucrats to citizens.

Fourth, states should make it easy to build more single-family detached housing in the suburbs and elsewhere. Keeping housing costs down for parents will help families grow and prevent incumbent homeowners from squeezing newcomers and the next generation into family-unfriendly living quarters.

Last, make sure elections get held in November of congressional election years. In many places around the country, local elections are held on "off" years or earlier in the year, which enables politically-active interest groups to overly influence low-turnout elections. Having elections when more people show up reduces the power of these special-interest groups.

We're sure there are other good ideas out there, too. Hopefully, states with smaller governments and larger private sectors will use these ideas to help themselves stay that way. Let's not retry the same old failed policies.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

1-4 / 9:00 am Construction Spending – Nov +1.0% +1.2% +0.9% +1.3%

1-5 / 9:00 am ISM Index – Dec 56.7 57.0 57.5

afternoon Total Car/Truck Sales – Nov 15.7 Mil 16.1 Mil 15.6 Mil

afternoon Domestic Car/Truck Sales – Nov 12.4 Mil 12.4 Mil 12.0 Mil

1-6 / 9:00 am Factory Orders – Nov +0.7% +0.7% +1.2%

1-7 / 7:30 am Initial Claims – Jan 4 803K 800K 787K

7:30 am Trade Balance - Nov -$67.0 Bil -$67.7 Bil -$63.1 Bil

9:00 am ISM Non Mfg Index – Dec 54.5 54.6 55.9

1-8 / 7:30 am Non-Farm Payrolls – Dec 62K 82K 245K

7:30 am Private Payrolls – Dec 50K 77K 344K

7:30 am Manufacturing Payrolls – Dec 16K 10K 27K

7:30 am Unemployment Rate – Dec 6.8% 6.7% 6.7%

7:30 am Average Hourly Earnings – Dec +0.2% +0.3% +0.3%

7:30 am Average Weekly Hours – Dec 34.8 34.8 34.8

7:30 am Consumer Credit– Nov $9.0 Bil $5.9 Bil $7.2 Bil

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Inflation, Debt, MMT, and Bitcoin

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

December 28, 2020

We can’t possibly exhaust our thoughts on all these topics in one Monday Morning Outlook, but we thought we’d give it the old college try.

This year, 2020, has been exceptionally interesting for investors. Not only have stocks soared to new highs and mortgage rates fallen to new lows, but Bitcoin, after languishing since 2017, has surged. Since bottoming near $5,000 in mid-March, when COVID shutdowns started, it has more than quintupled to above $27,000. By the time you read that last sentence, who knows?

Bitcoin backers view it as protection against fiscal ineptitude and policy mistakes, which could lead to the devaluation of sovereign currencies. In other words, inflation! And if you followed government policies this year, you understand where they are coming from. But, it’s not just crypto-currency investors that fret about inflation.

Gold bottomed at $1,471 in March and is now hovering near $1,900. Copper, silver, lumber, wheat, and soybeans have all soared this year, many to more than 5-year highs.

A Federal Reserve calculation of future inflation expectations, which is teased out of a comparison between regular Treasury securities and inflation-indexed securities, projects CPI inflation to be 2.0% annualized in the five-year period starting five years from now (so, roughly, 2026 – 2030). That’s an increase from the 1.8% expected a year ago, and much higher than the 0.8% projected back in mid-March.

This is all understandable. The monetary base has expanded by $1.6 trillion since February, the M2 measure of money has grown 25% in the past year, and the Fed says it doesn’t plan on lifting interest rates until at least 2024.

Meanwhile, the federal budget deficit soared last year, hitting $3.1 trillion in the Fiscal Year 2020, which ended in September, and looks likely to remain very large in FY 2021, as well. The United States, and other governments around the world, face huge fiscal issues in the years ahead.

It’s more than just deficits and debt. Every penny of government spending is taxed or borrowed from the private sector. And these transfers of wealth and income from current and future taxpayers to the government distort the economy in massive ways.

Some think that Modern Monetary Theory (MMT) allows the Fed to print money to finance this debt with no consequences. This is delusional, and we agree with Mervyn King, the former head of the Bank of England who says MMT is neither modern, monetary, or a theory. It’s been tried before, by the Romans, the Weimar Republic, Zimbabwe, Venezuela…all with disastrous results.

The question is timing. In the mid-2000s, people bought homes they couldn’t afford with interest rates that were artificially low. Now, the government is doing this.

For the time being this is manageable. This past fiscal year, net interest on the US federal debt was 1.6% of GDP versus 1.7% in 2019 and about 3.0% in the 1980s and 1990s. Yes, you got that right: in spite of soaring national debt in 2020, as well as a plunge in GDP, the interest burden was smaller as a share of GDP than it was the year before, and roughly half of where it was 30-years ago.

As a result, although the yawning budget deficit is not good and not sustainable in the long-term, the US is not Argentina, yet. Just because the doctor tells you the problem with your thyroid isn’t fatal, doesn’t mean you wouldn’t be better off without that problem.

For the record, even though we are upbeat on the economy and US equity markets for 2021, we don’t support any part of MMT. What we are is realistic and pragmatic. We can’t stop it, you can’t either. The narrative of COVID and shutdowns, the denial of fiscal reality and the power of politicians and media mean for the time being this is our path.

However, eventually math wins. New York, Illinois, California and other states, are watching people vote with their feet. We will see how they respond. It may surprise all of us. After all, politics is often backward. Richard Nixon went to China. Bill Clinton reformed welfare. With massive current deficits, and future growing deficits due to entitlement programs, the stars may be starting to align for some historic and long-awaited reforms.

Imagine the very possible scenario where Republicans take the House and keep the Senate in 2022. Then imagine a President Biden deciding not to run for re-election in 2024 and seeking a legacy. Reforming entitlement programs could be his legacy, with a bipartisan compromise facilitated by a solid working relationship between Biden and Senator Mitch McConnell.

We hear every day about the breakdown of America…with both sides telling us “this is the end.” As students of history, we don’t buy it. The US has been in pickles before, but we always “work the problem.”

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

12-30 / 8:45 am Chicago PMI – Dec 56.5 58.9 58.2

12-31 / 7:30 am Initial Claims – Dec 26 830K 805K 803K

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Larry is retiring after 52 years in the business.

December 29, 2020

Dear Clients and Friends,

I have reached a difficult decision this past month. I have decided after 52 years, since 1968, to retire my security licenses and from my position as Branch Manager for RJFS.

Family health issues were a large factor in this decision, but not the only one.

My son Matt, the current RJFS Branch Manager, has been with our practice since 1998 and purchased Goodrich & Associates, Inc. in 2014. He will continue to run the practice with the same guideline and principle as in the past.

You, our clients and friends, are the most important part of our practice. Therefore, it is my hope in the years to come that he and our excellent staff will continue to earn your business, trust and confidence.

For the foreseeable future I will still be associated with the office as a Non-Registered Employee and Certified Financial Planner professional (CFP). In this role I will continue to be available to discuss financial issues you may be faced with.

Over the next couple of months, I will try to call as many of you as possible to personally thank you for the years of confidence and business you have shared with me.

During this difficult year with the COVID-19 virus, may we all still manage to have a Merry Christmas and a better New Year.

Sincerely,

Larry+Signature+2019.jpg


Larry Goodrich, CFP ®

How Much You Need to Invest Every Month to Retire With $1 Million to $3 Million, Broken Down By Age

The coronavirus crisis may be pushing back a lot of retirement plans.

Nearly 30% of Americans say they have decreased or even stopped saving in 2020.

Unfortunately, those missed contributions can equal a lot of money decades into the future.

If you begin now, you can save $1 million, $2 million or $3 million — with the right amount of time and dedication. How much you’ll need to save every month will depend on how old you are when you start and how much money you want for retirement.

Personal finance site NerdWallet crunched the numbers, broken down by age group, to show how much you’ll have to stash away every month.

First, let’s go over how we got there. The math assumes you have no money in savings, that your investments will earn 6% annually and that you retire at 67.

Check out this video below to see how you can make it happen.

https://www.cnbc.com/2020/10/15/how-much-you-need-to-invest-a-month-to-retire-with-over-1-million.html

Phone System Error (Updated)

December 17, 2020

The phone connectivity problem has been resolved as of this morning, we are fully operational and thank you again for you patience!

December 16, 2020

Our office is currently experiencing technical difficulties with the phone connection. We are doing everything we can at this time to get it up and running smoothly again. We apologize for any inconvenience this may cause, and thank you for your patience while we handle the situation. Please feel free to email Haley.Hull@RaymondJames.com with any questions or urgent requests and we will do our best to respond in a timely manner. To contact Raymond James branch services directly call 800.248.8863. We are hoping this will be resolved by tomorrow morning and will keep you updated.

Thank you.

Stimulus, Bailouts, and the Fed

December 14, 2020

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Back room deals in Washington, DC always die and come back to life, over and over, again. And, even though a “COVID shutdown rescue package” seems like a no brainer, it’s been caught up in politics for months.

Democrats have been holding out for a huge, potentially $3 trillion dollar bill, while Republicans are looking at debt in the years ahead and suggesting that too much spending would create economic problems down the road. Nonetheless, a deal somewhere between $900 billion and $1 trillion appears likely to pass before year-end.

The details are still up in the air, but we’re confident anything that gets passed will include (among various other provisions) enlarged and extended unemployment benefits, more help for small businesses, some sort of liability shield to protect businesses from being held liable for COVID-19 infections, as well as some aid for state and local governments.

Although many in the GOP don’t like the idea of the federal government bailing out the states, we think some temporary extra federal funding could be justified under these extraordinary circumstances given that the light is at the end of the tunnel; a pandemic-related recession is not a normal recession. Small businesses didn’t expect to be fighting a pandemic this year and neither did state and local governments.

However, states are all different. Some came into 2020 with surpluses (rainy day funds), while others, like Illinois, were in financial trouble. It’s important that the federal government makes sure any funds going to states are designed to offset fiscal damage caused by COVID and the reaction to it, not to fix fiscal problems the states had prior to COVID.

One solution would be to distribute federal money to states based on their respective population sizes. This would compensate for lost revenue from shutdowns and avoid bailing out underfunded pension funds. Our best guess is that the current state bailout number being thrown around – about $160 billion – would comfortably compensate states for lost revenue from COVID shutdowns.

We also can’t help but notice that some big companies are pulling up stakes and moving their tents from California to Texas, while others are either moving from New York City to Florida or seriously considering it. These are big, headline grabbing moves, but probably just the tip of the iceberg. What we hope is that this is the last big spending bill of the COVID crisis. In 2021, the vaccine itself is the best stimulus we could ask for. As frontline workers get vaccinated, and vaccines for those who are most at risk are just weeks or months away, states should open up their economies relatively quickly.

Meanwhile, the Federal Reserve meets this week, and will issue a policy statement on Wednesday. Fed Chairman, Jerome Powell will hold the normal post-meeting press conference shortly thereafter. We expect the statement to be roughly the same as the last one in early November, which itself was very close to the prior statement in September. The Fed remains in stimulus mode.

We’ll be closely watching for changes to the Fed’s economic projections or the “dot plots,” which show where the Fed thinks it will be setting short-term interest rates for the next few years. In particular, when does the Fed think we’ll get back to a roughly 4.0% unemployment rate, or below? Does the Fed still think we won’t see 2.0% inflation until 2023? Do only four policymakers, like back in September, see the first rate hike happening before the end of 2023?

Many public policy questions will be answered this week. But keep in mind that these decisions are not what really drives the economy. Policy matters, but it’s entrepreneurs that ultimately drive economic growth.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

12-15 / 7:30 pm Empire State Mfg Index – Dec 6.5 9.1 6.3

7:30 am Import Prices – Nov +0.3% +0.3% -0.1%

7:30 am Export Prices – Nov +0.2% +0.2% +0.2%

8:15 am Industrial Production – Nov +0.3% +0.1% +1.1%

8:15 am Capacity Utilization – Nov 73.0% 72.8% 72.8%

12-16 / 7:30 am Retail Sales – Nov -0.3% -0.3% +0.3%

7:30 am Retail Sales Ex-Auto – Nov +0.1% +0.2% +0.2%

9:00 am Business Inventories – Oct +0.6% +0.7% +0.7%

12-17 / 7:30 am Initial Claims – Dec 12 815K 853K 853K

7:30 am Housing Starts - Nov 1.535 Mil 1.535 Mil 1.530 Mil

7:30 am Philly Fed Survey – Dec 20.0 26.7 26.3

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

2021: Robust Growth, Higher Inflation

Monday Morning Outlook

Brian S. Wesbury - Chief Economist

December 7, 2020

The COVID-19 Recession is the weirdest we’ve ever had. There is no way anyone could have forecast it. It did not happen because the Fed was too tight. It did not happen because of a trade war. It was self-inflicted, caused by COVID shutdowns.

And, in spite of a V-shaped bounce off the bottom – 33.1% annualized real growth in Q3, and likely 5%+ growth in Q4 – the economy is still smaller than it was a year ago.

Most big companies have not suffered financial damage, and clearly big tech has allowed much of the economy to operate virtually, but damage to small service industry businesses has been dramatic. What this means is that, while the economy will continue to heal, it will take years to fully recover.

The pace of recovery will depend heavily on renewed shutdowns and the speed of a vaccine rollout. We watch high frequency data, including TSA checkpoint flow-through, OpenTable reservations, rail traffic, and gasoline usage. These weekly, or daily measures turned up in May, signaling a second half recovery. Now, they have leveled out, and in some cases slightly weakened. “Green Shoots” are temporarily going dormant due to large state closures.

This may mean some data weakness in the first quarter of 2021. But don’t let that scare you, we do not see a double dip. In fact, we anticipate solid 3.0% real growth for 2021. Three percent growth might not sound great, but it would be the first time growth has reached 3% for any calendar year since 2005.

Nonetheless, any return to complete normalcy (getting the unemployment rate back down to under 4%) will take years. Because of reopening, the first waves of jobs came back fast. From the April peak of 14.7%, unemployment has fallen to 6.7% in November.

And even with our robust forecast of 6.3 million new jobs in 2021, the unemployment rate will still only fall to about 5% by the end of next year. At that rate, total jobs will still be below where they were in February 2020, before shutdowns began.

Part of this recovery has been artificial. Demand has remained robust because the Federal Reserve is monetizing stimulus the government has provided. That stimulus simply borrowed from the future to hold up spending now. This is already leading to imbalances in demand versus supply and, combined with 25% year-over-year growth in the M2, has pushed consumer and producer price indices higher. Too much money chasing too few goods (and services) is a natural recipe for higher inflation.

In terms of interest rates, the Fed is dead set on leaving short-term rates near zero for all of 2021, and we doubt inflation rising modestly above its 2.0% target will change its mind. After all, the Fed has already said it wants to see inflation exceed that target for a prolonged period before it raises rates. Higher inflation might get the Fed to start thinking about ending quantitative easing, but lifting short-term rates is an issue for 2022 and beyond, not 2021.

Long-term interest rates, however, should drift higher as investors get more confident about the economic recovery and see higher inflation. Expect the 10-year yield to finish about 1.40% next year. Yields could move even higher, but the low level of short-term rates, the Fed’s commitment to keep short rates low, and investor skepticism about how long higher inflation will last should keep long-term rates from soaring.

One segment of the economy deserves special attention, and that’s home building. The US was building too few homes for the past decade before COVID-19, and now the demand for residential real estate is even higher. Expect the surge in construction - and prices for single-family homes - to continue, as people seek more living space and life in places that provide adequate police protection.

In the next several weeks, news headlines may be filled with dire stories. But there is light at the end of the COVID-19 tunnel, and 2021 is likely to be a much better year than 2020.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

12-7 / 2:00 pm Consumer Credit– Oct $16.1 Bil $16.0 Bil $16.2 Bil

12-8 / 7:30 am Q3 Non-Farm Productivity +4.9% +5.3% +4.9%

7:30 am Q3 Unit Labor Costs -8.9% -7.8% -8.9%

12-10 / 7:30 am Initial Claims – Dec 5 725K 693K 712K

7:30 am CPI – Nov +0.1% +0.2% 0.0%

7:30 am “Core” CPI – Nov +0.1% +0.2% 0.0%

12-11 / 7:30 am PPI – Nov +0.1% +0.1% +0.3%

7:30 am “Core” PPI – Nov +0.2% +0.2% +0.1%

9:00 am U. Mich Consumer Sentiment- Dec 76.0 78.0 76.9

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Make Your Retirement Contributions Count

December 3, 2020

Dear Friends and Clients,

For the 2021 tax year, individual investors can contribute up to $6,000 to either a traditional or Roth IRA. If you’re age 50 or older, you can contribute an extra $1,000. I wanted to remind you so you can take full advantage of your ability to save toward retirement. Contributing as much as you can as early as possible allows those assets more time to potentially grow and compound. Keep in mind that contributions generally must be made before you file your tax return in April.

You may also contribute up to $19,500 to applicable 401(k), 403(b) and 457 plans, SAR-SEP plans and the federal government’s Thrift Savings Plan. The catch-up contribution limit for individuals age 50 or older remained $6,500. Employee contributions to qualified plans generally must be made by December 31.

Review the 2021 Retirement Plan Limits worksheet below for more details.

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If you have any questions about these limits or your retirement planning in general, feel free to contact us.

Sincerely,

Matt Goodrich, Financial Advisor                 Larry Goodrich, CFP ®

President, Goodrich & Associates, LLC       Vice President, Goodrich & Associates, LLC

Branch Manager, RJFS                                  Co-Branch Manager, RJFS


Raymond James financial advisors do not render advice on tax matters. Please consult a qualified professional regarding tax matters.

S&P 4,200 - Dow 35,000

Monday Morning Outlook

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 12/1/2020

In December 2019, we made a year-end 2020 forecast of 3,650 for the S&P 500. With the index closing Friday at 3,638, that looks like a very good call.

But we’d be fibbing if we didn’t admit to getting whipsawed by COVID-19. In the spring the S&P 500 fell as low as 2,237, pricing in a massive drop in corporate profits. We remained bullish but revised our year-end forecast down to 3,100. Then, in August, after analyzing data on COVID-19 and assessing the actual impact of shutdowns on growth and profits, we lifted our year-end S&P target for 2020 back to 3,650.

For next year, the fundamentals continue to suggest a bullish outlook. Our year-end 2021 call for the S&P 500 is 4,200 (up about 15% from last Friday), and we expect the Dow Jones Industrial Average to rise to 35,000.

We rely on our Capitalized Profits Model. The model takes the government’s measure of profits from the GDP reports, discounted by the 10-year US Treasury note yield, to calculate fair value. And, last week, corporate profits for the third quarter were reported at a record high, up 3.3% from a year ago.

The question is: what discount rate should we use? If we use the current 10-year Treasury yield of 0.84%, our model suggests the S&P 500 is grossly undervalued. But this is because the Federal Reserve is holding the entire interest rate structure at artificially low levels. Using these rates distorts valuations.

Using third quarter profits, it would take a 10-year yield of 2.8% for our model to show that the stock market is currently trading at fair value. And that assumes no further growth in profits.

Right now, in spite of Fed pressure to hold rates down, we expect the 10-year note to finish 2021 in the range of 1.25% to 1.5%. Nonetheless, we have chosen to use a more conservative 2% discount rate in our Capitalized Profits model. Using third quarter 2020 profits, that creates a fair value estimate for the S&P 500 of 5,150. And this does not take into account the highly likely boost to profits in the year ahead. As a result, we believe our year-end 2021 forecast of 4,200 is easily within reach.

Obviously, the year ahead is not without risk. Perhaps the various vaccines will be rolled-out more slowly than anticipated. Perhaps, the Georgia Senate elections in early January result in a House, Senate, and White House that all agree to more aggressive tax hikes than markets currently anticipate. Perhaps, perhaps, perhaps.

More likely, we anticipate the vaccines will work roughly as advertised, and businesses will continue to improve in handling the obstacles posed by the illness and government shutdowns alike. Meanwhile, the Senate should remain a check on aggressive tax hikes, and the federal courts may curb excesses in regulation. New entitlements? Highly unlikely. In addition, it looks like trade conflicts with other countries will ease.

We have been bullish since 2009, not because we are perma-bulls, as our detractors like to say, but because the fundamentals say we should be. Profits and interest rates drive stocks, we let these factors determine our outlook. Not politics, not fear, not greed…just math.

Date/Time (CST) U.S. Economic Data Consensus First Trust Actual Previous

11-30 / 8:45 am Chicago PMI – Nov 59.0 62.4 58.2 61.1

12-1 / 9:00 am ISM Index – Nov 58.0 57.9 59.3

9:00 am Construction Spending – Oct +0.8% +1.3% +0.3%

afternoon Total Car/Truck Sales – Nov 16.1 Mil 15.9 Mil 16.2 Mil

afternoon Domestic Car/Truck Sales – Nov 12.4 Mil 12.4 Mil 12.7 Mil

12-3 / 7:30 am Initial Claims – Nov 30 765K 765K 778K

9:00 am ISM Non Mfg Index – Nov 56.0 56.0 56.6

12-4 / 7:30 am Non-Farm Payrolls – Nov 500K 490K 638K

7:30 am Private Payrolls – Nov 608K 590K 906K

7:30 am Manufacturing Payrolls – Nov 46K 47K 38K

7:30 am Unemployment Rate – Nov 6.8% 6.8% 6.9%

7:30 am Average Hourly Earnings – Nov +0.1% +0.1% +0.1%

7:30 am Average Weekly Hours – Nov 34.8 34.8 34.8

7:30 am Int’l Trade Balance – Oct -$64.8 Bil -$64.8 Bil -$63.9 Bil

9:00 am Factory Orders – Oct +0.8% +0.6% +1.1%

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance.

What To Make Of Dow 30K

Thoughts on The Market

Larry Adam, CFA, CIMA®, CFP®, Chief Investment Officer

November 24, 2020

After recovering from its COVID-driven decline just last week, the Dow Jones Industrial Average has another record to celebrate. The index reached a major milestone as it closed above the 30,000 level for the first time on record today—its ninth new record high this year. If the month ended today (month-to-date: +13.4%), it would be the best month for the Dow Jones Industrial Average since January 1987 (+13.8%) and the best November since 1928. A wonderful way to celebrate the Thanksgiving holiday!

But what does it mean? The short answer is that the Dow is now up over 5% year-to-date on a price return basis, and that is has rallied more than 60% from its March 23 lows to fully recover its losses and once again hit record highs. Not too shabby! While these 1,000 point milestones are always hyped in the news headlines, we like to put them into perspective. For example, it is important to recognize that it has been more than 300 days since the last 1,000 point milestone—more than double the average duration for the previous ten one-thousand point increments—and the annualized return of 4.1% is the fifth lowest of any 1,000 point milestone on record. Incidentally, this 1,000 point increment only represented a 3.4% increase as each milestone going forward gets increasingly smaller.

The slowness of this milestone momentum is unsurprising given the historic levels of volatility experienced since the Dow reached the 29,000 level in mid-January, which was just prior to the COVID-driven drawdown. While the current COVID surge remains a key risk, a multitude of effective vaccine candidates and decreased levels of political uncertainty have overshadowed it. Nevertheless, the economic recovery from the COVID-induced recession has led to vast levels of dispersion beneath the Dow’s surface. In accordance with our expectation for a K-shaped economic recovery, constituents in the tech and home improvement areas have contributed heavily in this last 1,000 point gain. More specifically, while the Dow is up ~4% since the last milestone, leaders such as Apple (+49%), Walmart (+31%), and Home Depot (+22%) have lifted the index while constituents in the Industrial and Energy sectors, such as Chevron (-18%) and Boeing (-34%), have detracted.

Is the Dow Jones expensive and should we adjust portfolios? Given the recent strong rally in the equity market, we have grown more cautious in the near term as valuations (24.4x LTM P/E) are the most expensive they have been since at least 2001. However, despite the potential for near-term volatility, our positive outlook for equities over the longer term is supported by fundamental factors such as our forecast for a bounce back in economic activity in 2021, expectations for a substantial earnings rebound in 2021, an accommodative Federal Reserve, and heightened levels of cash still on the sidelines. With our optimistic long term outlook, we remind investors that timing the market is a difficult task, and we would not use psychological levels such as these to make portfolio changes.

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All expressions of opinion are those of Investment Strategy and not those of Raymond James & Associates, Inc. and are subject to change. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. No investment strategy can guarantee success. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risks including the possible loss of capital. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal. It is not possible to invest directly in an index. Further information regarding these investments is available from your financial advisor. Material is provided for informational purposes only and does not constitute a recommendation.