The case for optimism:  Amid the surge in coronavirus cases nationwide, revived restrictions on businesses and chaos in Washington, investors are looking to brighter days ahead, as the economy rebounds and vaccines conquer COVID. 

Economy

The U.S. economy stalled at the end of the 2020, as the pandemic raged and the impact of the roughly $2-trillion March fiscal stimulus package faded.  U.S. employers cut 140,000 jobs in December.  It was the first net decline in payrolls since last spring’s mass layoffs and followed five straight months in which hiring had slowed. 

The unemployment rate was unchanged at 6.7%, down sharply from its high of nearly 15% in April but still close to double the 3.5% rate in the same month a year earlier.  December’s job losses were heavily concentrated in the leisure and hospitality sector, which shed nearly a half a million jobs as the surge in coronavirus cases led to closings of restaurants and many families were forced to cancel trips home for the holidays.  It’s a reminder that the labor market can’t fully bounce back in any sustainable form until the pandemic is under control. 

However, industries less exposed to the pandemic, such as manufacturers and construction firms, continued to add jobs in December.  The concentrated nature of last months’ job losses indicates that the damage from the resurgent pandemic had not spread to the rest of the economy.  This may allow for a faster recovery as vaccinations become more widespread. 

Other recent economic signals suggest the potential for a post-COVID boom this year.  The Institute for Supply Management’s services index rose 1.3 points in December to 57.2, which indicates the economy is still expanding.  The ISM manufacturing index jumped to 60.7, the strongest growth since August 2018.

Economists now see a stronger recovery than many had earlier predicted but there remains a lot of lost ground to recover.  U.S. output remains 3.5% below where it was at the end of 2019.    While the U.S. economy has regained half of the jobs lost due to the lockdown, nearly 11 million workers remain jobless. 

Fiscal policy

The Paycheck Protection Program of forgivable loans is set to resume, as the federal government extends efforts to preserve jobs and help small businesses weather the coronavirus pandemic and related lockdowns.  Last month, Congress authorized $284 billion to provide forgivable loans to small businesses as part of its broader $900-billion coronavirus relief bill.  The new iteration of the Paycheck Protection Program will be far smaller than the original, which doled out $525 billion between April and August, and more narrowly focused on smaller businesses that can demonstrate need. 

The program’s reopening comes at a crucial time for many small businesses that have been hit hard by the pandemic’s economic fallout and a resurgence in cases this winter.  The program, which will be administered by the Small Business Administration, is intended to provide a lifeline to many small businesses, allowing them to keep workers on the payrolls.  The new PPP is available to borrowers that missed out on the first round and those who already received a PPP loan and need another. 

President-elect Biden is calling for trillions in additional aid, including $2,000 stimulus checks for families after the unexpectedly poor December jobs report.  With the Democrats set to control both houses of Congress after Mr. Biden takes charge, additional stimulus is considered highly likely.  However, the 50-50 partisan split in the Senate will make more ambitious proposals challenging to pass, testing the new president’s influence over lawmakers from both parties. 

Markets

Last week will not be remembered for the fact that stock market indexes hit new highs or even for the record toll of new COVID-19 cases, hospitalizations and deaths.  What will be remembered is another day that will live in infamy in the nation’s history, when a mob, incited by the president, stormed the Capitol and forced members of Congress to flee for safety.  Yet the stock market didn’t flinch and continued to rise, with the Dow Jones Industrials, the S&P 500 and the Nasdaq Composite setting records. 

What accounts for the stock market’s disregard for these awful events?

Interest rates are extraordinarily low.  The Federal Reserve and other central banks have said they are committed to keeping short-term interest rates low for the foreseeable future.  When rates are low, stocks and other risk assets are comparatively attractive.  While expectations for additional fiscal stimulus has pushed the yield on the 10-year Treasury bond above 1% for the first time since March, long-term bond rates also remain very low, underpinning stocks.      

The pandemic is the main cause of global economic troubles and will eventually end.  Despite challenges rolling out the vaccines, their arrival means there is light at the end of the tunnel.  As the impact on infection rates and hospitalizations becomes visible, confidence should return that it is safe to return to more normal economic activity.  This should result in a sharp acceleration of the recovery, which could be quite meaningful. 

The likelihood of some additional fiscal stimulus has increased. As previously mentioned, President-elect Biden will very likely seek more aid for people in need and for local governments, which is expected to increase economic growth. 

The elections may provide an opportunity for bipartisan cooperation. Given the Democratic Party’s razor-thin margin in the Senate and narrow majority in the House, truly sweeping legislative changes will be difficult, if not impossible.  While some increased spending is likely (e.g., infrastructure, climate), this slim grip on power implies big tax increases on wealthy investors or corporations may not happen soon, at least prior to the next elections in 2022. 

Also worth noting is that the U.S. savings rate has soared to 12.9%, nearly twice as high as before the pandemic.  There is tremendous pent-up demand to resume normal economic activity.  Once the vaccines become widely adopted and the pandemic is brought under control, we should expect to see a surge of growth.  Look at pictures of the Roaring ‘20s, which followed the Spanish Flu pandemic of 1918, as a hopeful beacon of what we can expect. 

Outlook

We can finally say good riddance to 2020 and look forward to better days ahead this year.  As the vaccines become widely adopted, the pandemic should be brought under control, allowing normal economic activity to resume.  The recent $900-billion Congressional relief package should provide support for the economy to get back on its feet.  Additional fiscal stimulus should serve as a catalyst for growth.  Hopefully, political tensions will ease with the inauguration of Mr. Biden as our 46th president.  Record low interest rates are fueling a mortgage refinancing boom that is adding to consumer’s spending and saving reserve.  People can’t wait to resume their normal lives, and we should be optimistic for a post-COVID economic boom.  I wish you and your families a healthy, happy and prosperous new year. 

All opinions and data included in this market commentary are as of 1/12/2021 and are subject to change. The opinions and views expressed herein are not intended to be relied upon as a factual prediction or forecast of actual future events or performance or a guarantee of future results or investment advice.

All investments are subject to risk, including loss of principal. Past performance is no guarantee of future results. Investors cannot invest directly in an index.

The information contained should not be used as the sole basis to make any investment decisions.

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