How has the economy changed over the last year and how do we proceed with investing?
Our economy and more importantly, the global economy is going through a rapid transformation to a “digital economy”. This is huge and can be equated to moving to the internet or from land phone lines to cell phones. Several economists and portfolio managers believe this transformation is also playing out in the stock markets around the globe and especially here in the USA. We now see two (2) economies here in the USA. You have the new “digital” economy which is all your technology companies and those other companies that are rapidly shifting their businesses to a digital platform. And you have the “mainstream” economy which consists of those businesses that are more service-oriented and non-digital. Think of retail, movie theatres and restaurants, leisure and travel businesses. This also means we have two (2) stock markets, digital and mainstream. This better explains why the overall markets continue to set new record highs while unemployment is at an all-time high. Digital companies and the rapid transition to a digital economy are leading the way.
Are specific consumer behaviors helping the transformation to a digital economy?
The combination of a strong consumer economy leading up to and into the Covid-19 pandemic is responsible for a dramatic shift in consumer behavior. People are now spending more online than ever before. Groceries, household goods, electronics, clothing, and more are being ordered online and picked up or delivered. The pandemic has driven consumers to buy online where they may not have just a short six months ago. This is the new digital economy.
What is the number one catalyst to be aware of when planning for economic recovery?
As companies continue to report their earnings each quarter, we see surprises every week. Look at Best Buy for example. This company continues to push its e-commerce strategy and is shifting 30-50 percent of their retail store space to “delivery hubs” in order to better compete in the new digital economy. They had great earnings and the stock moved up as a result. Company earnings are and will continue to be the key driver of the stock markets. However, there is one other significant catalyst that will affect the markets. The pandemic forced the shutdown of the economy. Controlling Covid-19 and most importantly, having a successful vaccine will unleash the economies around the world. This is significant because it will be a huge global catalyst. This means you have to be invested to take advantage of this pending catalyst.
What are your predictions for tax increases over the next few years?
The shutdown of the economy due to the pandemic also resulted in the need to support the businesses and individuals that are unemployed, as unemployment hit a new high. This meant the government had to print more money (debt) to provide the stimulus packages which to date total $6.6 trillion and there is talk of another $1-3 trillion. There is an old adage that states “you can’t print your way out of a recession.” In short, printing more money causes inflation as the money supply increases. Inflation devalues the US dollars which means US bond values as well. When the government is unable to sell bonds (the value is too low) they have no choice but to print more money which could potentially lead to hyperinflation and more debt. When the interest on the US debt becomes too high it starts to crowd out other programs like Social Security, Medicaid and Medicare. The only solution is to raise taxes. If you look at the math and science behind the numbers, we believe there are few options other than to raise taxes and that this will be a major source of debate since we are in an election season. Planning for increased taxes is essential, especially for those individuals who have their retirement assets in a 401(k), IRA, 403(b) or TSA.
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Mr. Cunningham provides a variety of services under the brand Coastal Financial Advisors, LLC. Investment advisory services are provided through Foundations Investment Advisors, LLC, an SEC-registered investment advisor.