Friday Market Musings
Soft Patches of Economic Data Not Yet Indicative of an End to the Recovery. As cases of COVID increase, more restrictions and draconian lockdowns are being implemented across the country. While this is affecting certain aspects of the economy, it does not yet spell an on-coming recession. As I wrote in our commentary earlier this week, the market would be disappointed if another round of COVID stimulus was not passed. Indeed, we did not get a stimulus deal and Dow futures are down this morning. On the other hand, the FDA advisory board agreed to approve Pfizer's vaccine for use in the U.S. Here's our view of what is happening:
The Good and the Bad of Economic Releases. What we have seen in the economic data this week is not all bad. Yesterday, Weekly Jobless Claims disappointed by rising to 853,000 versus 725,000 expected. This increase is due primarily to an increase in COVID cases and more stringent lockdowns that have ensued. However, we saw a similar event in August. The re-opening of several states in June/July led to an increase in COVID cases and WJC increased by 13.7% in one week during August. That event turned out to be short-lived and did not turn into a broader trend in claims. The jury is still out on this week's increase in claims, but a successful vaccine delivery (more on that later) could ease the tensions businesses are feeling that could prevent more hiring. On the bright side, Labor Costs dropped in November more than expected and Job Openings increased in October. The latest survey of Small Businesses conducted by the National Federation of Independent Business indicates that optimism is still high among small business owners, but there is "uncertainty" among those same owners due to increased COVID restrictions. Yet, 53% of those business owners surveyed said they actively hired or tried to hire new employees in the month of November. Consumer Credit declined in October. This release actually has two possible views - first, consumers are being more careful with their individual balance sheets and not running up debt irresponsibly, or second, consumers are pulling back on spending. As we've noted before, October can be a weak month for spending before consumers ramp up spending habits during the holiday season. November's retail sales and consumption data will give us a better picture of the state of the consumer (who make up two-thirds of U.S. GDP). What is under-reported and not spoken of enough - mainly due to politics - is the ramifications of lockdowns and restrictions on people's lives and to the economy. Admittedly, uber-wealth philanthropist Melinda Gates recently stated in an article with regard to lockdowns, "What did surprise us is we hadn't really thought through the economic impacts." Meanwhile, alcoholism is up 14% versus a year ago, drug overdoses are up as much as 42% versus this same time last year, and mental health disorders are up 40% from a year ago. Actions have consequences.
2. Vaccines - Should We or Should We Not? Unfortunately, the proposition of taking one of the new COVID vaccines has been muddied by politics and fear. In reality, there's not enough data to warrant fear of the new vaccines. The key element in the Pfizer and Moderna vaccines is mRNA. mRNA is a synthetic genetic material that guides the SARS-CoV-2 protein production inside the muscle cells. How is that important? First, it's a way to help the body produce the antibodies necessary to fight off COVID, without introducing the live virus into the bloodstream (i.e., safer). Second, because the mRNA protein is synthetic in nature, much of the development and manufacturing process involved with typical vaccines is eliminated (i.e., faster). Different politicians have publicly stated they would not trust the vaccines because the existing administration helped reduce some government red tape. But, more importantly, this type of vaccine is revolutionary and has been the primary driver in reducing the time that it normally takes to develop a vaccine. Both the Pfizer vaccine (recently approved) and the Moderna vaccine (up for approval next week), had success in their trials of 95% and 94.1%, respectively. These success rates far surpass the FDA's bar for approval of 50% efficacy! The next vaccine up for approval (AstraZeneca) - which falls in the camp of a typical vaccine and does not utilize mRNA - has shown 90% efficacy, far surpassing the FDA's bar of 50%. Safety concerns? It doesn't look like there's sufficient evidence to warrant fear of these vaccines at this time.
3. Preview of 2021. There are a few unknowns that could change our outlook for next year - namely the vaccines and runoff elections in GA - but, in general, our view is a positive one for equities in 2021. While the S&P 500 Index is expected to have a good year (16-18% return), other asset classes are more attractive and are positioned to out-perform traditional large cap U.S. equities. A further decline in the U.S. dollar next year would mean that International equities should out-perform U.S. equities. More specifically, with an improving risk appetite, Emerging Markets would benefit from a declining dollar. As state and local economies begin to re-open next year (assuming the vaccines are successful), value stocks and cyclicals will out-perform growth, momentum stocks as many of the COVID-darling technology stocks will pull back and under-perform. Among fixed income assets, credit and high yield still have some room to run. Real assets - commodities and real estate - should do well in 2021. We believe the Fed will struggle next year with inflation as they try to keep the Fed Funds Rate low with high unemployment through the first two quarters of next year. One caveat is Small Cap stocks. If the GA runoff elections result in GOP victories, there should be a stalemate in Congress to prevent a significant increase in corporate tax rates. That would be a boon for Small Caps, that are still under-valued compared to Large Caps. If those elections result in Democrat victories, there is a real possibility that tax rates are headed higher, which would favor Large Caps. We will wait to see how things turn out after January 5th, but overall, next year should be a good year for equities.