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The 100 Year Rerun

Last May we introduced the concept of dividing the pandemic's economic impact into three distinct phases:
  • Phase 1: The severe decline
  • Phase 2: The initial bounce back
  • Phase 3: The road to recovery
Now that we are firmly situated in Phase 3, where the economy may remain for a while, it is important to look longer-term. 

What reasonable long-term implications can we expect from the pandemic-era?

The Roaring Twenties
I've recently read a number of opinion pieces welcoming the dawn of a new Roaring Twenties, referring to the 1920s post-World War 1 period. The original Roaring Twenties was a period of great economic and cultural advancement and prosperity. In large part this was driven by suppressed consumption during WWI and the ensuing recessions from 1918-1921. This pent-up demand, along with an accelerating labor force, led to exuberant consumption. At the same time, technological advancements created productivity gains, which spawned rising wages.

The economic prosperity of the 1920s was driven by a combination of multiple positive factors occurring simultaneously. In other words, the environment was primed for growth.

Fast forward to today and there are some similarities worth noting. Demand destruction from the COVID-19 pandemic has temporarily depressed consumption. While today's suppressed demand may not reach the same depths encountered during WWI, the self-inflicted nature is creating a comparable environment. As the pandemic rages on, repressed demand is growing. When the pandemic ends, this pent-up demand may manifest into the real economy.

And, did I mention, the Roaring Twenties occurred right after the "Spanish flu" pandemic of 1918? Pent-up demand from the pandemic created many of the prime growth characteristics that we hope are also building today amid the COVID-19 pandemic.

A Word of Caution
It would be very fitting that a century after the original Roaring Twenties we witnessed another. While there are some similarities, the prosperity of the 1920s was only possible through a unique combination of positive effects occurring concurrently. Are there enough similarities between the 2020s and the 1920s to create the same effect? It's too early to tell.

On the surface there are a tremendous number of challenges we face as a country and economy if we want to see a thriving Roaring Twenties again. However, in the 1920s the U.S. faced just as many challenges as it emerged from a World War, the Pandemic of 1918, and multiple recessions. These challenges create opportunities. With enough opportunities and enough positive headway, the stars could align for a repeat.

Allegiant's Take
From the very beginning of the pandemic—as Allegiant outlined the three anticipated phases of economic impact—we identified the self-inflicted demand destruction and subsequent pent-up demand as a large driving force for a quick economic recovery. This has largely played out as the U.S. is firmly situated in Phase 3.

However, the world has yet to control the pandemic. Demand has shifted, but it has not fully recovered. We believe further pent-up demand will lead to future economic growth. The real question is how long will it last and how strong will it be? That largely depends on how quickly (and completely) we control the pandemic and how broad-based the recovery is. First, we need to get the roughly 10 million unemployed workers back to work at good wages. Then we need to rebuild the middle class where rising wages provide tremendous potential for increased consumption. It worked in the 1920s as war heroes re-entered the workforce and it can work today as the pandemic recovery marches on.

As John Adams said, "Every problem is an opportunity in disguise." The challenges we face today have the potential to lead to great successes in the future, but only if we are successful in addressing these issues and seizing the opportunities. In many respects that is what stock markets are already beginning to price in. Now we need to deliver.

Benjamin W. Jones, CFP®, AIF®
President, Chief Investment Officer, Principal

240 South Pineapple Avenue, Suite 200
Sarasota, Florida 34236
Telephone (941) 365-3745
Toll Free (800) 926-5237

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