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Linnard Financial Management & Planning, Inc.

Fee-Only Financial Planning and Investment Advisor


October 1, 2020

Outlook & Trends

Have we dodged the proverbial bullet? Or should we be preparing physically, mentally, medically and financially for a Covid counterattack reinforced by the flu? Most people have at least partially adjusted to the virus war that has been raging around us on multiple fronts, being fought by the invisible air force. Hopefully the answer is “yes”, we have learned much, but it is always good to be prepared. However, we should not be so focused on the preparation to be mired in the problems, worries and dangers that Covid presents. Without question, this experience has changed our lives, but then life is always changing.

On the other hand, where there is difficulty there is also opportunity. The more that we can remain aware and adapt, the more resilient we will become. We can pick the good outcomes that arise and leave the bad behind. Just as the space program of the 1960s generated spin-off advances in technology, the current heavy investment in immunology and medical technology can be expected to provide new applications for years to come. The benefits of a broader application of communications technology have the potential to change our lives. The rapid acceptance of communications for telecommuting, education and shopping has accelerated personal telecommunications well beyond telephones and video games. Reducing the energy requirements of travel may become a factor in reducing carbon emissions. Who would have thought that Covid might slow the melting of Arctic ice? There will be good things coming from this experience, if we remain open to change.

The Markets

Overall, the third quarter provided reasonable gains, despite a correction being in place for most of September. It is amazing to see how quickly the market jumps to the government’s marionette strings, despite the risk inherent in a major economic shock. It was another example of how the market’s old rules considering valuation and economic outlooks have been replaced by the siren song of liquidity, in the form of free government-created money. The S&P 500 and more speculative technology growth stocks provided the leadership for aggressive investors, while middle and small cap assets lagged their larger companions. Conservative portfolios recorded lower gains as bonds were generally flat for the period and moderated returns.

The Economy

Do you remember all the hand-wringing about the yield curve forecasting a coming recession over a year ago? Now that we are there, with a recession officially declared in June, we do not hear the word very often. That may be because there is more journalistic concern about the coronavirus than the stock market. Perhaps it is because the ”V” shaped recovery appears to be coming to pass. It certainly has from a stock market perspective, as the stock market has reacted to trillions of dollars of government spending support, as have many of the big companies that make up the S&P 500. It does not look like a V though to the small businesses that have closed their doors or to their ex-employees looking for a new job.

Capacity utilization figures suggest that the economy is about halfway back and recovering rapidly. The current estimate is that GDP is growing at an annual rate of 14-30%. This compares to a loss rate of -31.7% in the second quarter. More than just a number, the recovery means that life is normalizing for many: more shopping, vacationing, and socializing, albeit at a safe distance. Life is still abnormal for the 8.4% unemployed, many of whom worked in businesses like restaurants and salons that rely on direct personal contact. We also hear anecdotally that a migration of city dwellers has begun as they opt for the lower density of suburban and country living. Remarkably, real estate reports show the price of single family homes increasing 9.1%. Excess demand for housing and limited supply has decreased the inventory of homes for sale by a whopping 21%!

Will the recovery continue? Since this is not a financial recession, the normal processes that lead us out of recessions are not fully in play this time. We remain vulnerable to a resurgence of Covid and Flu in the winter. For its part, the Federal Reserve recently revised its policy and plans to keep interest rates low, possibly for years, until inflation gets back above 2% to support employment. Low rates help businesses borrow, home buyers afford mortgages and support the values of stocks.

This policy may be helpful, even absolutely necessary, in the short-term for economic support, but we must also consider the long-term effects on financial planning over our lifetime. A series of well-intentioned short-term policies can create risk later. Stimulative policy does not necessarily result in increased long-term economic value, which is characterized by improvement of our well-being both as individuals and as a nation.  Artificially reducing interest rates without producing growth has the effect of shifting wealth from savers to borrowers. In fact, while the Fed suggests that their policy is to help employment, the result of the series of their short-term policies turns out to have created employment volatility. They also are getting close to the point where they have little choice other than to continue to support the economy and markets. This support creates market value expansion and abets the very discrepancy of rich and poor that the government would like to avoid.

Over the last 20-plus years, the government has been replacing organic economic growth by “printing money” to maintain our standard of living.  The creation of excess dollars in the economy has brought interest rates to an all-time low. Ten-year treasury bonds now pay .7 % in interest (compared to 14.5% in 1980). This long decrease in rates has been a primary tailwind for high bond and stock returns over the period. Since rates are now almost zero, this process cannot continue for much longer. In fact, on the several occasions that the Fed mentioned that they would be cutting back support, the market dropped rapidly. Parenthetically, this implies that people saving for retirement should consider basing their assumptions on less return than what has been considered to be a “normal” market for many years. It is clear that those who depended on safe treasury bonds for returns of several percent plus over the last 40 years will need to recalibrate in a .7% world. Ditto for stocks.

There is a second implication of this government largess. The US, like most nations these days, is deeply in debt with a public debt of $26.8T, which is growing every year at a rate of $3.3T. At some point the accumulation has to at least slow down, if not stop altogether. If this is true, how, as a nation, can we maintain the standard of living that we have grown accustomed to? The answer apparently is by forgetting prudence and by being creative. Enter Modern Monetary Theory (“MMT” is also known in some quarters as the Magic Money Tree).  Until recently, politicians at least paid lip service to maintaining the type of balanced budget which families must do, balancing income and expense. Modern Monetary Theory is modern because it is a way of thinking that posits that fiscal restraint is not important. A sovereign government can print its own money, so if borrowing is not required, there is no limit to how much can be spent. If too much is spent beyond income, the difference will simply go into inflation. This process of money creation can exist until inflation becomes objectionable. Until then, inflation makes dollars worth less, so debt can be paid back more cheaply. After that stops working, we’ll figure out how to reset the obligations. This theory is a perfect match for politicians who can pretty much spend as much as they would like without incurring objections. How much have we heard about fiscal responsibility when putting together several trillions of dollars in spending for Covid support without concern for how (or if) it would be repaid. Giving money to all people is a policy that Ben Bernanke called “helicopter money”, because it is the same as taking a stack of money and throwing it out of a helicopter.

Planning must look at risks over the long-run. The impact is greatest for younger people and less for older. Consider:

1.      The safest form of wealth is “human capital”, the return one gets from work, which is only likely to be diminished by       limited ambition, health and/or age. Plan for a long and rewarding career.

2.      Financial assets worked well for years, but do not expect them to replace work and wealth preservation to fund retirement.

3.      In the future, people may have less savings at today’s retirement age. Retirement may need to start later.

4.      In an inflationary environment, real assets, like homes and land, are likely to hold their value better than financial assets.

5.      If inflation increases, and returns from safe assets are lower, it will be necessary to take more risk just to break even. Even more risk is necessary to generate any significant additional non-labor earnings.

6.      Low interest encourages borrowers to use debt for investment leverage. High leverage, like a house mortgage, magnifies both risk and return, so both should be considered, Remember 2007-2008 when the housing bubble burst?

7.      Eventually increasing inflation and interest will reverse the dynamic and result in a headwind for financial assets.

These are not issues for tomorrow or next week, but they are issues to consider and plan for. What has worked in the past will likely change in the future. We suggest considering the possibilities for you and your children. If you create and maintain a financial plan, you will be ready.  LFM&P is ready to help when you are.



David C. Linnard, MBA, CFP®



Barbara V. Linnard
Vice President


A Registered Investment Advisor and NAPFA-Registered Financial Advisor

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The contents of Outlook & Trends reflects the general opinions of LFM&P, which may change at any time, and is not intended to provide investment or planning advice. Such advice is only provided by means of individual agreement with LFM&P.