Podcast Details Fourth Quarter Economic Update October 8, 2020 – Season 4, Episode 1 In this episode, we will cover a variety of topics from the Federal Reserve's current stance on interest rates to the Mortgage market. We will also share some fun facts you should know and a number of "firsts" you should be aware of. Link To Podcast
Spotify: Click Here Google Podcasts: Click Here Download: Click Here Podcast Transcript Scott Albraccio: Welcome to CTMA's podcast. I'm your host, Scott Albraccio. Here's an opportunity for us to update you on current market trends and conditions, and issues you should be considering when investing into your 401k, wealth management plan, or pre-funding. Scott Albraccio: In this episode, we're going to do an economic overview of the markets and what has happened over the last six months since the COVID epidemic hit. We'll take a look at the state of the economy and what is impacting some of the changes that are going on in the marketplace, the ups and downs, take a look at some of the impacts in the highs and lows of the mortgage market, what's driving the markets at this point in time, peek into NASDAQ and the four or five top companies that are performing well. We'll also cover a little bit on GDP, oil, and unemployment or employment, if you will. And then talk a little bit about the firsts. 2020 has been a year of firsts. Scott Albraccio: So it's been a while since we've gotten together and we're going to go into the month of October, which is a month away from elections. We wanted to give a basic economic overview to our listeners, talk to them about some of the aspects of the state of the economy, and what's been going on out in the marketplace itself. Today, we've got Chris Abely here providing us with some commentary. So Chris, good morning, Chris Abely, CFA: Good morning. What a strange year. Scott Albraccio: It has been at that, hasn't it? Chris Abely, CFA: It's been such a dramatic six month period of time that trying to speak to some of this stuff has been a fool's errand, because it's changed so dramatically and things that people thought were true aren't true. Things that people thought were false are true. I think that's very timely. Very timely. Scott Albraccio: Very fluid. So let's talk a little bit about the economy overall, and what's front and center on it right now is really the Federal Reserve and their policy of maintaining zero interest rates. And listening to the radio coming in this morning, you're looking at possibly two, three years' worth of zero interest rates. How is that impacting us in economy, and what do we need to take away from that? Chris Abely, CFA: Well, it's essentially saying money's free, huh? Let's just step back and take some statistics into all of this so that you can put some of this in context, because most of what's happened in the last six, eight months or so has been firsts for economics. Let me tell you a couple of things. The Federal Reserve started on March 4th of this year with a $4.25 trillion balance sheet. As of today, they have $7 trillion on their balance sheet, which means that the Federal Reserve essentially put $3 trillion worth of money into the system in a period of less than six months. The federal government put $2.4 trillion worth of stimulus into the economy. Essentially what they did was they said, we're going to give people a lot of money to sustain them during this crisis. Where they're going to get it? The Federal Reserve is going to produce it. Well, okay. So most people in economics think, if there's a lot of debt out there, that the price of it should be more expensive. Well, interest rates are at historical lows. Anyone want to take a look at the housing market? And the fact that the 30-year mortgage is now at like 2.75, something that you would have never thought during a pandemic occurred, which was that the housing market took off. Prices of houses in the last six months have gone up about 10%. Now there's a lot going on there as well, so we'll stay away from that for now. But suffice to say, there have been a lot of firsts in this marketplace. And as I said, the lowest mortgage rates in history. Chris Abely, CFA: Here's a couple of fun facts to go with things about the economy. Guitar sales are at their all-time high. Scott Albraccio: Really? Chris Abely, CFA: You cannot find a dog in the dog pound. Why do I know all this about veterinarians? Because of our veterinarian business. And it is booming. Here's something else for people to consider, that the price of volatility, that is the thing that people say is risk. In March, the price of volatility was $64. Today, it's $20, which basically means that the price of volatility has been cut by two thirds in the last six months, which again flies in the face of everybody thinking that the market is a very volatile place and is going to continue to be volatile. There are a lot of mixed signals being sent. I just want to finish with one thing before we get onto is that, we are not in a recession, yet we're in a pandemic that would lend most people to believe that we should be in a recession. Scott Albraccio: I just want to back up a minute and define for our listeners. When you speak of volatility, how are you gauging that? Give them some context around the price of volatility. Chris Abely, CFA: There's a measure in the marketplace for volatility. It's called the VIX. And it is the thing that the market uses to say how volatile, or how much price movement there'll be in something. The higher you pay for volatility, the more risk is in the market. Volatility spiked in March when the market was down so much, and it happened so quickly. But yet, during this period of time where we still have a lot of volatile days in the market, the price of volatility has gone down. I only bring that up to frame things in a way that people who might be listening to this are think into themselves, they don't understand, there's these crosscurrents, these signals that one thing would tell you that something's going to be wrong, and yet it comes out where it turns out to be okay. So there are a lot of crosscurrents out there. Scott Albraccio: Give us a little insight as to what's been driving the markets. We've been sitting here watching the lows of March and we've recouped a lot of our losses at that point in time. What are the underlying drivers or factors that are pushing the market up at this point in time? Chris Abely, CFA: I just want to clarify something when you say the market. If you're talking about the S&P 500 or you're talking about the NASDAQ, what has driven that higher has basically been four or five stocks, which are all new economy related, and they are very, very large capitalization stocks. In addition to the idea of why the market has grown so much, you have to always remember the market is a story. And does the story get realized or not get realized? Chris Abely, CFA: But it's very important to understand that Apple is now $2 trillion of market capitalization or thereabouts, which basically means it's larger than Italy, Brazil, Canada, Russia, and a whole lot more. It's staggering to think that a company could be worth more than a country. And the simple fact is, it may not be, it just may be a point in time. So people should be aware that when you're talking about the market, it's really been six securities, eight securities that have done the moving. Most other securities have gone down. When persons in a diversified portfolio, they may feel like they're missing out on something because they're not focused completely on the six companies that are growing. Well, that is not a good strategy to invest in just six companies. A broader market picture would tell you that only certain parts of the economy have recovered. Most of it is still languishing. Scott Albraccio: So when you talk about that, you always hear about the top five, but nobody ever talks about the bottom 400 that are in the S&P, and what they're doing. Chris Abely, CFA: That's exactly right. We could dissect the S&P 500 as a market capitalization weighted index and show that these bigger companies, as they get bigger, skew the numbers even more. But all you hear is this headline about, the market's making all the time new highs while the economy is in the drink. It doesn't make any sense. Well, it makes sense at this point in time. Whether or not it makes sense next year remains to be seen. Chris Abely, CFA: The things that have driven those securities are this liquidity, and the fact that people are staying at home. The business model attached to buying at home has been leveraged far greater than anyone ever expected, because no one was predicting a pandemic in March or February of this year. The consequence of the pandemic, by putting people in their houses and then giving them money, created this demand that we've never seen before. So the real question becomes, how long does that demand sustain itself? And/or, what happens as a result of the election and the other things that are going to occur? As we try to figure out how this all unfolds as we wind down from the pandemic is almost anyone's guess, but we have to be conscious of the fact that some things have dramatically changed as far as the financing and the financials of the United States. Chris Abely, CFA: We've added a couple of trillion dollars' worth of debt onto the amount of debt that's owed. Staggering numbers, the money supply, that is how much money there is in the system. A year ago in August, there was about $15 trillion worth of money in the system. A year later, there's $18.4 trillion in the system. So there's a lot of money sloshing around out there, and it's looking for a place to go. Scott Albraccio: Three other points that I think would be relevant to bring up and discuss, one being GDP. And let me give them to you now, oil and then employment. What are those impacts having right now currently on the economy in the United States? Chris Abely, CFA: Well, the gross domestic product, it fell the most it had ever fallen in the second quarter, but the third quarter appears to be coming back. And they're saying we're no longer in a recession, so we're growing again. When do we get to the point where we're back where we were in, say January of this year? That's years away, I think. Remember that the firsts this year also included the lowest unemployment in history. So when we entered this year, we were at the lowest unemployment in history. Then we had the one month that was the largest increase in the unemployment in history. So we have the largest fiscal stimulus in history. We have the lowest interest rates in history. We have more people sitting at home having to wait out the COVID. It's never been experienced before. The makeup of GDP is changing. Why is it changing? Well, it's changing because people are looking to get services done differently. Whether or not that prevails as we go through next year remains to be seen, principally because we're social animals. The context of our human behavior and our economic behavior will probably go back to what our roots are, which is social. So going places, going to stadiums, doing all the things that are usual and customary prior to the COVID occurring. From the GDP standpoint, the gross domestic product is back growing, but will it be back at the $22 trillion it was at the outset of this year? When will it get back there? Probably a couple of years. And that will depend on what happens from an elections perspective, and what the government policies are. Chris Abely, CFA: Oil. Oil was, at the beginning of this year, a hundred million barrels a day were being used. And in the space of a month, we went up from a hundred million barrels being used to 70 million barrels a day being used. The demand curves and the supply curves couldn't take it. It went below zero. The price of oil went below zero. How could the price of oil go below zero? That doesn't make any sense. Tell that to the people who had to sell it below zero. Now it's recovered back to $40. There's a lot of pressure on oil, associated with the fact that the demand curves haven't come back. That is, that the economy hasn't come back, jets aren't flying, and there's a whole industry attached to the economy that's really not moving, which is the travel industry and the other, which is a source of use of oil. That and the fact that there's this "green philosophy" now permeating is putting pressure on those securities, and probably will put a lot of pressure on the price of oil as we go through the next few years, depending on the legislation. Chris Abely, CFA: As far as employment goes, I don't think you can assess employment until after the first quarter of next year. And that's really primarily because you have to figure out what they're going to do from a stimulus perspective. Are they going to do anything from a stimulus perspective? And what are the end results of that? Does the PPP loans, because they can be forgiven or they've gone through that six-month period, do people start to lay off people as a result of the PPP loans no longer being in play? There's a lot of things that could cause unemployment to last for a lot longer than people are expecting. Scott Albraccio: Hmm. So as we started off this session by saying 2020 has been a year of firsts, as you've so eloquently reviewed with us. Is there anything else you'd like to leave our listeners with before we end this session? Chris Abely, CFA: Well, I think the first thing that people should be thinking about is the way that their assets are positioned and are they diversified. When you consider the kind of numbers that we've thrown out and what's happened with respect to the stock market being basically a stock market of, as I said, six, eight, 10 companies, that you have to be careful that you're not looking at what just happened yesterday as the way to be prepared for today. Simply this. Diversification, while this past year or so has not been an effective tool because the market has been concentrated in one area, should prove to be an effective tool for diminishing volatility, whether or not you're investing in gold, whether or not you're investing in alternative assets, whether or not you're investing in large capitalization, small capitalization, or international. Chris Abely, CFA: And I know people look at China very differently than they did five years ago, say, but it's foolhardy to think that China isn't going to be one of the dominant, if not the dominant power as we go into the 30s, 40s and 50s in the 2000s. So to ignore them as an asset place to invest, I think would be not recognizing something that's just the truth. Scott Albraccio: Thank you very much, Chris, appreciate your insights. Scott Albraccio: I hope you've enjoyed the insights that Chris has provided us on the economic overview. We'll be releasing our pre presidential election podcast coming up here in the next week. Don't forget to listen in on that, where we tie in what we were talking about, the economy in the United States, as to how the presidential election may impact the future of those policies. Scott Albraccio: Thank you for listening to our podcast. I hope you found that informative. Don't forget to subscribe to our channel, and never miss an episode.
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