- Peaceful protests have morphed into violent riots in the wake of George Floyd's death.
- These events are as much about economic inequality as they are police brutality.
- The have-nots are fed up with the continued growth in wealth disparity.
- These developments may have political consequences that lead to policy changes, which will have significant implications for investors.
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My job is to navigate the market, manage risk, and try to make money, so anything other than an apolitical approach, one that injects bias into my analysis, is counterproductive. Still, I must consider how policies might change when leadership does, and as the November election approaches, the market will become acutely focused on the polls. The investment implications are enormous.
As peaceful protests morph into violent riots in more than 40 cities nationwide, I think few have yet to see the forest for the trees when it comes to the groundswell of unrest spreading across the country in the aftermath of the death of George Floyd. These demonstrations could end up being about a lot more than police brutality, which in no way minimizes the importance of, or focus on, this man's life. On the contrary, in retrospect, his death may be the catalyst for significant change.
I sense a reawakening of the frustrations over the growing economic inequality in this country, which last took center stage following the financial crisis in 2011 with the Occupy Wall Street movement. While that movement fell off the front pages in the years that followed, wealth disparity did not, and it has continued to grow over the past decade.
As the expansion lost steam in 2019 and the debt-fueled rate of economic growth was slowing, the pandemic struck, bringing on a recession with unprecedented force and speed. Typically, those with less suffer more during recessions, but this one has been especially brutally discriminating. It has had a far more devastating impact on minority groups, the uninsured, and low-income workers. We are in the worst recession since the Great Depression, with unemployment approaching 20%.
Meanwhile, the Federal Reserve has implemented policies to battle this economic contraction that continues to do little more than inflate financial asset values. Yet, financial assets are predominately held by the haves, which does not help the have-nots. While the Fed purports that it will be lending money to the small business community through cleverly named facilities like the Main Street Lending Program, there is nothing main street about this program at all. To qualify, a company must only have less than $5 billion in revenue and 15,000 employees.
Whereas the Fed has clearly focused its efforts on the haves, the federal government has tried to focus on the have-nots through the CARES Act, which still managed to include a tax break of $135 billion for Americans with incomes over $500,000 a year. Millions who lost their jobs are receiving enhanced unemployment benefits that include an extra $600 per month, but that will come to an end two months from now. One-time payments of up to $1,200 per taxpayer and $500 per child were made to what amounts to the bottom 90% of wage earners. This has stemmed the economic bleeding like a tourniquet, but it won't last long.
Source: Social Security Administration
Perhaps this seemed like an equitable split of assistance initially, but as the stock market marches upward towards its previous all-time highs with the gradual reopening of the economy, millions are starting to recognize that they will be losing their benefits this summer. Many will not have jobs waiting for them when the benefits end. Millions more never received any assistance at all, as the Paycheck Protection Program (PPP) intended for the truly small businesses only gave 4.4 million loans to a community of more than 30 million nationwide. Most small businesses are single-member enterprises, and it appears they were largely left behind. Yet, the federal government is bailing out industries like the airlines with a $25 billion loan.
I think the general public has come to understand that recessions have become periods during which the rich get richer and the poor get poorer, and they see it happening all over again. The response to this pandemic-induced recession is clearly widening the divide between the haves and the have-nots. It appears to me that the have-nots are not having it anymore. This started with the death of a presumed innocent man in Minnesota at the hands of authorities. He was clearly one of the have-nots, and while the police officers involved may not be the haves, they represent the government establishment that is responsible for the plight of the have-nots. The protests and riots are increasingly becoming an expression of the rage over what continues to be growing economic inequality in this country.
The political consequences of these events shouldn't be underestimated, as they will have significant implications for investors. Instead of occurring after a recession and election, as they did in 2011, these demonstrations are occurring during a recession and before an election. I think the populist movement that took a chance on Donald Trump in 2016 is likely to pivot in the opposite direction in 2020, resulting in a Biden presidency and a public that will hold his him to account. As the market starts to sense this in the polls, stock valuations should come under pressure.
The most significant change for financial markets under a Biden administration would come in the form of tax policy. Tax rates will go up for corporations and the wealthy provided Congress is willing to go along. If not, the public may change the makeup of Congress in 2022. Many of the regulations that were scrapped by the Trump administration will be reimplemented. All these developments will favor labor over capital. These will all be perceived to be major headwinds for markets in the near term, but if changes in policy lead to more economic equality, then the expansion that follows should be on a far sounder foundation.
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Lawrence Fuller has been managing portfolios for individual investors for 30 years, starting his career at Merrill Lynch in 1993 and working in the same capacity with several other Wall Street firms before realizing his long-term goal of complete independence when he founded Fuller Asset Management.
He is the leader of the investing group The Portfolio Architect, which focuses on an overall economic and market outlook that complements an all-weather investment strategy designed to produce consistent risk-adjusted market returns. Features include: Portfolio construction guidance, access to an “All-Weather” model portfolio and a dividend and options income portfolio, a daily brief summarizing current events, a week ahead newsletter, technical and fundamental reports, trade alerts, and 24/7 chat. Learn More.
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