Thankfully, hope! The vaccine news from Pfizer and bioNTech is a potential game changer. While it will take time to produce, distribute and become widely adopted, the vaccine should curtail the pandemic and support a return to normalcy next year. This is great news for public health, the economy and the markets.
The U.S. economy is continuing to recover, rebounding quickly from the sharp pandemic-induced downturn this spring. Gross domestic output grew a record 7.4% in the third quarter, following a contraction of nearly 10% in the second quarter, the most significant decline ever recorded.
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 last year. While the U.S. economy has regained half of the jobs lost due to the lockdown, nearly 11 million workers remain jobless. The unemployment rate has declined from 14.7% to 6.9% but remains nearly twice as high as it was pre-Covid.
The rise in coronavirus infections could prompt cities and states to reimpose lockdown measures and consumers to stay at home. While the prospect for a vaccine that should be available early next year reduces the risks of a double dip recession, the next few months could prove challenging. However, deployment of the vaccine should help the hardest hit services sector normalize more rapidly, likely by the second quarter of next year. As evidence mounts that the virus is under control, citizens will gain the confidence required to normalize behavior. This should accelerate the recovery next year, creating a virtuous cycle of increased consumer spending, increased hiring and business investment, and rising wages that result in more spending.
A brief comment on the recent U.S. elections. Pending the outcome of the two Georgia Senate run-off elections, it appears the U.S. will have divided government. The Democrats will control the White House and the House; the Republicans appear likely to retain control of the Senate. As a result, prospects for big changes in individual or corporate tax rates have receded. There is the potential for a shift in the regulatory landscape, through both executive orders and enforcement. Meanwhile, the Senate holds the cards for key appointments and legislation.
The sharp surge in coronavirus cases nationwide and revived restrictions on businesses haven’t jolted fiscal stimulus talks back to life. Republicans and Democrats remain at odds about the price tag of a new agreement. Top Democrats are seeking a $2.4 trillion relief package and Senate Republicans favor the roughly $650 billion legislation the GOP proposed earlier this year. President-elect Biden has said he would like to see a deal as soon as possible, while President Trump hasn’t weighed in. It seems less likely that the two parties will reach a deal during a lame duck session of Congress.
The Federal Reserve remains on hold. They plan to keep short-term rates anchored at zero through 2023. They may extend their emergency asset purchase programs another 3 to 6 months. This would be mostly a symbolic gesture to reassure markets that they stand ready to provide support if needed.
Equity markets soared last week to all-time highs, on optimism over the vaccine news. Divided government in Washington suites investors just fine, as the prospects for material changes in tax policies have dimmed. Stock prices have been supported by better than expected corporate profits. Expectations that interest rates should remain low for
several more years are also underpinning stocks.
Bond markets continue to be dominated by central banks, which have committed to maintain ZIRP/NIRP policies (zero or negative short-term interest rates). As a result, nearly 90% of the global bond supply yields less than 2%. In the latest sign of investors stretching to find returns, high yield bonds traded at a record low yield of 4.6% last week.
Despite the strong rally in risk assets, market volatility may increase over the next few months. Investors will seek clarity on (a) Covid-19 cases; (b) vaccine timing; (c) Senate elections; and (d) fiscal stimulus.
The resurgence of Covid-19 infections, hospitalizations and deaths across the country is leading to rollbacks and delays in the re-opening of the economy. States and cities have recently mandated early closures of restaurants, bars and gyms; they have imposed limitations on large gatherings. Initially, vaccinations will target the most vulnerable populations, health care workers and first responders. 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. While we are in for a rough few months until the vaccine is available, there is finally light at the end of the tunnel.
I want to wish you and your families a very Happy Thanksgiving!
All opinions and data included in this market commentary are as of November 12, 2020 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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