Despite The Good News, The Economy Is Still Treading Water…
Being an economist must be a tough job. That’s probably true at any time, but now is an especially challenging time for economists.
The economy seems to have stalled. This is shown in the chart of the CNN Back-to-Normal Index, which I’ve talked about before. The chart has been near its current level of 83% since October. The index ranges from zero (representing no economic activity) to 100% (representing the economy returning to its pre-pandemic level in March 2020).
This seems counterintuitive based on the headlines. After all, vaccines are being distributed and should help the economy recover. The pace of vaccination has increased rapidly, and Bloomberg estimates 75% of the population could be fully inoculated by August.
Goldman Sachs is more optimistic, expecting the United States to reach herd immunity in June or July. Economists at Goldman expect that news, combined with the recent stimulus package, to increase economic growth significantly. The firm recently told clients, “We have raised our GDP forecast to reflect the latest fiscal policy news and now expect 8% growth in 2021 (Q4/Q4) and an unemployment rate of 4% at end-2021 — the lowest among consensus forecasts—that falls to 3.5% in 2022 and 3.2% in 2023.”
The firm also expects inflation to remain subdued.
To sum up, despite all the good news — the fast pace of vaccination, businesses opening back up, expectations for accelerating growth, subdued inflation — the economy is still in the same place it was in October.
But as you know, I focus on markets rather than the economy. And I’m seeing significant risks in those forecasts. I do believe the vaccination is good news. But the stall in the Back-to-Normal Index tells me there are structural changes in the economy that even trillions of dollars in stimulus can’t quickly reverse. That tells me that inflation risks are higher than consensus estimates since the stimulus is injecting trillions of dollars into a stagnant economy.
How I’m Trading Right Now
While risks are high, they can be managed by embracing the changes that have occurred. For example, I recently talked about the current dangers with a more traditional approach like the 60/40 portfolio (60% stocks, 40% bonds) in this piece.
One way investors and traders can embrace the change instead of fighting it (or doing nothing) is with covered calls.
This strategy can boost income from the equity allocation of a retirement account and potentially offset some of the loss of income caused by low interest rates.
Now, I know what you might be thinking… Probably something along the lines of: “Aren’t options risky?” or “I don’t know the first thing about trading options.” But covered calls are quite possibly the safest way to trade options. Savvy traders and investors alike have been using it to juice their income for decades.
Here’s how it works… A call option gives the buyer the right — but not the obligation — to buy a stock from the call seller if it’s trading above a specified price before a specified date.
When you sell a call option, you accept the potential obligation to sell a particular stock at a specified price at a set time in the future. When you sell a call, you generate instant income in the form of a premium. I like to think of this as an “insurance policy” because it helps investors re-frame the way they think about this strategy. You get paid to protect your portfolio against potential downside.
Because of this, my strategy is much safer than the risky speculation most people think about when they hear the word “options”… Plus, the beauty is that it allows income investors to earn more from their holdings than what they simply would with dividends alone.