Change in GDP projections
Source: Federal Reserve, as of September 17, 2020.
- Many of the recent headlines on Fed policy have focused on the Fed’s newfound tolerance for inflation. While that is significant, Fed officials caught investors’ attention at their meeting this week for another reason: a grim economic outlook.
- Fed Chair Powell acknowledged in his post-meeting statement on Wednesday the rapid recovery in economic activity since Q2 – but he also noted that major economic indicators remain well below their pre-pandemic levels, adding that the outlook remains “highly uncertain.”1
- While FOMC officials upgraded their economic outlook for the remainder of 2020 to -3.7%, up from -6.5% in June, projections are still highly negative.2 Notably, they also downgraded their GDP outlooks for the next two years by 1.0% and 0.5%, respectively, highlighting their view that the economic recovery in the coming years could be long and slow.2
- U.S. stocks have seemingly glossed over a potentially challenging economic environment. The market recovery since March has been a narrow one, however, with large-cap tech names fueling returns. The S&P 500, for example, has returned 6.2% YTD compared to -13.6% for small-cap stocks.3
- Markets are forward-looking, and their movements do not always correlate to economic activity. However, investors may be wise in seeking to protect their portfolios against the current challenges that seem likely to continue. These include further bouts of volatility (particularly if tech stocks decline) combined with the potential for negative yields from traditional fixed income investments.