Macro Musings December 2020
- Economic growth should rebound in 2021 thanks to a red-hot housing market and strength in the financial positioning of households, which are in much better shape than they were after the last recession.
- The Federal Reserve has promised to support the economy as much as possible by keeping rates low until unemployment drops to pre-pandemic levels, even if inflation rises above their stated target of two percent.
- November saw some of the best gains ever for the S&P 500, which rose over 10%. In previous years, when we had a double-digit return month, the market was consistently higher six and twelve months later.
THE HOUSING MARKET IS ON FIRE, AND THAT’S GREAT FOR THE OVERALL ECONOMY
Housing was one of the first sectors to rebound after the spring lockdowns. The combination of historically low mortgage rates, a pandemic driven exodus from major cities, and the millennial generation entering peak buying years proved to be a positive formula. New and existing home sales rebounded immediately, and both are at decade highs. Housing starts, a leading indicator measuring new residential construction, is also approaching pre-pandemic levels. The chart below depicts this V-shaped recovery:
Housing starts should continue to accelerate in 2021 as the supply of homes has fallen to a multidecade low:
This is great news not only for the housing market but for the economy as a whole. Housing activity leads to more spending and generates all types of additional business. People buy new furniture and appliances. They invest in home improvements like kitchen and bathroom upgrades. A surge in housing starts and building permits can boost demand for contractors, creating new construction jobs and boosting employment. With service industries like restaurants, travel, and entertainment suffering, it is important for other areas of the economy to pick up the slack. The housing market has been doing so all year, and we expect that to continue in 2021.
HOUSEHOLDS ARE IN THE BEST POSITION COMING OUT OF A RECESSION IN DECADES.
The biggest difference between the pandemic recession and the global financial crisis of 2008- 2009 is how strong household finances are this time around. In the previous recession, both housing prices and the stock market saw severe drawdowns in value, decimating household balance sheets, which have most of their wealth tied to those two forms of investment. Net worth collapsed and did not meaningfully start recovering until 2012.
Contrast that with today, where a hot housing market and a quick market rebound have left households in a much stronger position. Part of this was due to the recession’s short-term nature, but credit is also owed to the fiscal and monetary policy responses. The CARES Act, passed by Congress, provided direct income to the unemployed and financial support to businesses, while the Fed’s unprecedented actions helped stabilize the credit markets.
The following chart shows the drastic difference. It looks at the net worth of households compared to GDP: