MARKET UPDATE: May 11, 2020

PWA’s observation of a disconnect between Wall Street and Main Street is evolving into a firm opinion. After experiencing a week where the DOW rose 2.5% set against an unemployment rate increasing to nearly 15%, we are turning our attention to what the post-pandemic environment may bring.

Back to the Future 

Throughout history, America has experienced wars, the Great Depression, recessions, social upheaval, and now, the COVID-19 coronavirus.  Past events have had a lasting effect on our American way of life.  This one will too.  As always, our American can-do attitude breeds experimentation and innovation, resulting in outcomes that forever change, and largely improve, our American lifestyle and standard of living. 

The definition of normal will likely be quite different coming out of this event. A brief look back might provide insight into our future.

Education

Education, as we know it, is a relatively new phenomenon. As recently as 1940 only 50% of adult Americans had a high school education. Many children formerly worked on the family farm; in the ‘40s, America and the world was still largely dependent on family farms for our food source. Farming was nearly 7% of US GDP compared with less than 2% today.  As years passed, the US focused more resources and attention on education standards resulting in a system that became the gold standard: Free K through 12 education for all. In 2019, approximately 90% of adults over the age of 25 have a high school diploma and more than one-third are college graduates.

During the coronavirus pandemic, parents have been challenged by at-home schooling, while campus-based college students—furnished with distance learning replacements—are demanding reimbursement from colleges and universities. For the college Class of 2024, a significant number of colleges have delayed their “reply/accept date” from May 1 to June 1. Uncertainty pervades higher education, with some institutions taking a wait-and-see approach to opening their doors in September. What is abundantly clear is that the college experience will be different from the past.

A more educated nation with the freedom to use acquired knowledge to innovate is at the heart of our economic system. The prior delivery system, (largely in-person, in-classroom), has been dramatically impacted by the virus. How we choose to educate our youth in the post-pandemic environment will continue its evolution. Regardless of the outcome, a best-in-breed education system is imperative if America wishes to sustain the economic stature we enjoy. In education, we have a new normal regarding the delivery system, but the outcomes generated from that system must enhance the state of future generations of Americans.  

Retail

Just as the family farm continues to be replaced by corporate farms, the neighborhood grocer, clothier, and hardware provider—the neighborhood retailer—is being replaced by Amazon and its online competitors.  With the development and opening of Southdale Shopping Center, located in Edina, Minnesota in 1956, retailing moved from the center of towns into surrounding areas accessible by more shoppers eager to efficiently accomplish as much as possible.  Malls prospered and expanded throughout the nation, eventually reaching a peak as urban sprawl continued.  And then it all changed.  Malls, dependent upon anchor tenants, began to fail as those anchor tenants saw their business plans become obsolete. Over the past month a variety of retailers have declared, or are preparing to declare, bankruptcy.  Luxury chain Neiman Marcus filed for Chapter 11 bankruptcy protection, while Lord & Taylor is reportedly looking to liquidate its stores as soon as they are able to reopen. Nordstrom said it is permanently closing 16 locations, while J.C. Penney skipped another interest payment, speeding up the clock for its potential bankruptcy filing. And Macy’s announced it will be pushing off reporting quarterly earnings, due to the disruption it has faced from the coronavirus pandemic.

In the midst of this unprecedented event, Walmart and Amazon have prospered as they have been able to deliver goods and services through multiple channels.  The web has provided a means for acquiring all of the toilet paper and cleaning products unavailable at the local grocery store. Yet, quarantined shoppers hunger to return to their local retail outlets.  Or do they?

Millennials value time and efficiency over the ability to touch a fabric or hand select a bundle of carrots based on the appearance in the produce rack.  As Americans age, those willing to purchase goods and services via the web will continue to grow, eventually dwarfing the number of consumers preferring to shop “the old way.” The pandemic has hastened that change.  The pandemic has hastened the death of traditional retail just as the malls hastened the death of downtown shopping districts.  This new normal is unlikely to be reversed.

Taxation 

American history is anchored in tax rebellions. “Taxation without representation” sparked Colonists to destroy three shiploads of British tea on December 16, 1773. In 1791, Alexander Hamilton’s proposed excise tax on alcohol was enough to prompt a three-year Whiskey Rebellion in Monongahela, Pennsylvania. It is in American DNA to oppose excessive taxation, yet the top marginal income rate reached 94% in 1944 on income over $200k (~$3 million in 2020 dollars). 

The following graph illustrates the highest marginal income tax rates since its inception:

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Source: Tax Policy Center

Many are surprised to discover that the 1950s were not years of consistently expansive, ever-blooming prosperity. There was a recession in 1949-50, another in 1953-54, followed by a major recession in 1957-58 (one as severe in terms of drop of GDP as the Great Recession of 2008-09), followed by yet another recession in 1960-61. The consistency of recessions (four in 11 years) meant that cyclical unemployment was pervasive. The only other post-war period that endured four recessions in 11 years was from 1970-81: The era of stagflation. 

These dire economic circumstances spurred President Kennedy to present Congress with a tax proposal that would reduce the top marginal tax rate from a whopping 91% down to 65% in January 1963 (Revenue Act of 1964). In 1981, President Reagan cut the top income tax rate from 70% to 50% (Economic Recovery Tax Act); he further reduced the top rate to 28% (Tax Reform Act of 1986). 

As of December 2019, the U.S. economy had expanded for a record 126 straight months, the longest period in the country’s history according to the National Bureau of Economic Research. Put another way, the U.S. had avoided a recession for an entire calendar decade for the first time on record. Currently, the top marginal tax rate is 37% and the federal corporate tax rate is set at 21%. 

With federal, state and local government coffers starving for revenue, we are likely to experience a wave of politicians calling for higher taxes on the rich.

Most Americans, regardless of their household incomes, do not describe or view themselves as rich.  According to the US Census Bureau, the median household income was $63,179 in 2018. A family with income of $130,000, more than twice the average, could arguably be considered rich even if living from paycheck-to-paycheck.  During the previous administration, the line for those households considered rich was drawn at $250,000.  Our suspicion is that the future definition will be at a substantially lower level of income.

Regardless of the definition, we believe that all income earners should prepare to share more of their earnings with the taxing authorities.

A Brand-New World…Again!

Beyond the scenarios explored above, there are numerous things we might imagine:

  • Profound changes to how we worship as faith communities.
  • The preference of a work-at-home setting over an office. Skyscrapers may remain empty. Cities may be shunned.
  • The disappearance of cash, in favor of 100% digital transactions and wallets.
  • The vanishing of small business owners, ranging from restaurants to auto repair shops.
  • The closing of theme parks. (Riding a roller coaster while screaming through a mask seem incompatible.) 
  • The end of the handshake or friendly hug.  Social distancing at the extreme has us waving or offering the peace sign.

Whatever a brand-new world may bring, PWA takes comfort in believing that some things will never change. It is our absolute privilege to assist you on your journey to financial freedom—a journey that may have hit a speed bump or detour—but know that the path is navigable and we are honored to accompany you.

For all Mothers, we are hopeful that you had a wonderful Mother’s Day.

Thank you for your continued confidence.

Be safe, 

Joseph A. Scarpo

Founder & CEO

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