Sometimes it feels like we are living through a giant experiment. Oh wait; we are!
Most experiments happen in a lab setting. Typically, a control group is isolated from the test group, so a comparison of results will prove the hypothesis true or false. It is almost impossible to do this with economics and government policy, because there is no “lab” with a control group to test a thesis. We are both the test and control group. Our leaders change policy and hope it turns out ok, because there are many factors outside of their control that will affect the outcome. They look to the past for clues on how to act and are influenced by political pressures to deliver a desired outcome by those in power. Not exactly pure science.
Today we have 2 massive factors in play: monetary policy and fiscal policy. Monetary policy revolves around the Federal Reserve and how its policies affect markets, lending and regulations. More monetary stimulus will result from a continuation of zero interest rates and quantitative easing. Fiscal policy is focused on government spending and tax policy. More fiscal stimulus will result from increased government spending and lower taxes. The interaction of these two critical factors will drive our inflation rates, growth and markets for the next few years.
The attached chart shows our guess as to the general outcome given different scenarios. There is no way to model this well, there are too many variables. However, we can try to define the best case and the worst case from the perspective of the bond and equity markets.
Bond market best case: No more fiscal stimulus and the Fed halts monetary stimulus.
Stock market best case: The Fed continues stimulus, but Congress fails to pass additional stimulus.
What do the market say today? Scenario 3: Less fiscal stimulus and more monetary stimulus is what the bond and stock markets are banking on. Any changes will change the market outcomes. It doesn't have to be rocket science because the Fed and Congress are swinging sledgehammers.
Robert Lloyd, CFA®
Chief Investment Officer
Lloyds Intrepid Wealth Management
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