Foundation For Slower Economic Growth Being Laid, Stocks Still Work

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In our Winter 2020 Investor Letter released earlier this month, our firm indicated our real GDP growth expectation for this year is in the mid single digit percentage range. We continue to hold that view given likely pent-up demand and our expectation the economy is exciting the recession. The uncertainty around the virus spread and vaccination progress is a headwind to our growth expectation though. Additionally, before the inauguration of President Biden on January 20, I highlighted the potential risk of a policy error to the economic recovery. Some of the executive orders (EO) signed by the President after he was sworn into office on January 20 now heighten this risk in my view. For investors it is important to separate their political/policy concerns with the view of the performance of the investment markets

To that end the recently signed EO's will have a direct impact on some economic activity. For example, revoking the Keystone pipeline permit will result in some job losses. Keep in mind, some investors view this as a positive and green and alternative energy investments might benefit from this action. One EO signed by the President instructs the government to revise fuel economy standards in California essentially allowing the state to have stricter caps on emissions. The Biden administration is also proposing higher taxes for individuals and businesses. I highlight some of these EO actions and the administrations tax policy goals as it increases the regulatory and tax burden on businesses and individuals which could create a headwind to economic growth.

The Legatum Institute maintains a  Prosperity Index for a large number of countries with one component categorized as the Burden of Government Regulation. According to the institute, this index component "captures how much effort and time are required to comply with regulations, including tax regulations." The index goes back to 2007 and below is a chart of the index overlaid with the rolling 10-year annualized U.S. real GDP growth rate. Correlation does not mean causation; however, the higher regulatory burden does seem to equate to slower economic growth as shown on the chart. Coming out of the 2008/2009 recession the GDP rolling average growth rate saw a brief pick up; however, as the regulatory burden increased, GDP growth slowed.

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Disclaimer: The information and content should not be construed as a recommendation to invest or trade in any type of security. Neither the information nor any opinion expressed constitutes a ...

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