Fire Capital Market Update - 4Q 2020

DAWN OF A NEW ERA

ECONOMIC RECOVERY

Much has happened throughout 2020 and so much hangs in the balance for the remainder of this year and beyond.  The COVID-19 global pandemic has caused enormous disruption and brought transformative change.  What has remained salient is humanity’s enduring resiliency and resolve to move forward.  Indeed, we may be witnessing the dawn of a new era.  

As we consider the near-term outlook, we are faced with several major themes worth exploring: The sustainability of the economic recovery, the geopolitical landscape, and the sudden acceleration of long-term trends. On the back of monumental stimulus, a synchronized global recovery is underway. While headwinds remain, the economic improvement from the depths in March of this year has been swift and pronounced.

Key elements of the U.S. economy have exceeded expectations.  On the demand side of the economy, we are witnessing a resurgence of the housing market which has been aided by record-low mortgage rates.  Retail spending has rebounded and exceeded prior levels due to fiscal stimulus payments and adaptation to e-commerce.  Lastly, consumer sentiment has seen a remarkable recovery in just three months.  To put this in perspective, from its lowest point during the Great Financial Crisis, it took consumer sentiment four years to get back to the point we see today.

On the supply side of the economy, we are also seeing signs that long-term growth drivers are rebounding better that was to be expected.  In particular, business activity in both the manufacturing and service sectors are expanding at rates that exceed pre-pandemic levels.  A survey of business leaders’ expectations of near-term spending rose to an all-time high reflecting desires to hire workers and purchase new equipment to better navigate the evolving competitive landscape.

While this is very promising and forms the basis for a sustained economic expansion, the fragility of the recovery is underpinned by the containment of COVID-19.  Federal Reserve Chairman, Jeremy Powell, recently commented that a second wave of coronavirus could, "more significantly limit economic activity, not to mention the tragic effects on lives and well-being."

The global handling of COVID has been disparate both in terms of methods and political reception.  The recent positive diagnosis of President Trump serves as a stark reminder that the virus is indiscriminate in its approach. With less than thirty days until the U.S. Presidential election, we must consider the implications of a change in administration as well as the congressional make-up more broadly.

While a specific budget remains elusive, under Biden’s “Build Back Better” plan, we can anticipate that fiscal expenditures would increase.  Items of focus are infrastructure and clean energy estimated to cost $2 trillion in his first term.  This increase would be offset, at least in part, by an increase in corporate and personal taxes.

The probability of accomplishing these objectives increases if Democrats take the Senate.  Additionally, if Democrats gain enough seats in the Senate to remove the filibuster, this could clear the way for progressive reform. For instance, a rollback of President Trump’s deregulation, strengthening labor collective bargaining, anti-trust enforcement, and reinstatement of the individual mandate for our healthcare system.

GEOPOLITICAL LANDSCAPE

Turning our attention to the geopolitical landscape, regardless of the outcome of the U.S. election, we anticipate a continuation of a nationalistic approach to foreign trade. A major agenda for the current administration has been to reassert America’s influence & interests amongst our trading partners.

As of late, China has been the focal point with both sides exchanging policy blows that have crept into the private sector. Under a Biden presidency, “Build Back Better” may introduce a different tone and method but the underlying current is the same.  Rather than focus on direct negotiation with trading partners, Biden would likely rely on the WTO to broker agreements.  Instead of reducing the competitiveness of foreign products through tariffs, Biden aims to tighten, “Buy American” laws.  

What we are witnessing is the acceleration of a longer-term trend – bringing back U.S. manufacturing. U.S. imports from China peaked in the middle of the last decade due, in part, to rising labor costs as China pivoted to a domestic consumer-led economy.  More recently, the disruption to the global supply chain induced by the COVID-19 pandemic left many companies vulnerable.  A recent survey reflects the shift to U.S. production that many companies are considering.

ACCELERATION OF LONG-TERM TRENDS

An additional monumental trend we are seeing converge in real-time is productivity gains from the Work from Home (WFH) movement.  This has been made possible by the emergence of the “Digital Economy.”  The Bureau of Economic Analysis (BEA) defines the Digital Economy as “the Internet and related information and communications technologies.”  The U.S. also has the highest density of tech companies, according to Bloomberg’s 2019 Innovation Index.

Companies globally are investing heavily to keep up with this trend and the U.S. is benefiting substantially.  While we have seen stock market valuations explode for these companies poised to leverage this phenomenon, predominately in the NASDAQ, it is the sustained job growth that is often overlooked. The Digital Economy has been an important driver of capex and employment, both of which are helping boost long-term potential GDP growth.

As we traverse the remainder of this year, we will be participating in the dawn of a new era.  One filled with human and technological innovation.  We are likely at the onset of a sustainable economic expansion fueled by investment and productivity growth.  The geopolitical climate is challenging if not familiar.  All of this gives way to longer-term trends becoming actionable opportunities.  Over this past year, we have been constantly reminded of humanity’s fragility.  As we consider our future, we are encouraged by its resiliency.

‍