Less than a month into 2021, markets and broader society are dealing with events and developments never seen in our nation’s history. Following the tumultuous year that has just concluded, the early weeks of 2021 show no signs of an end to historically anomalous developments with potential market impacts.
With this in mind, a variety of unprecedented market conditions and catalysts are intersecting within the investment world. These include:
Markets have successfully looked past the deeply disturbing assault and siege upon the U.S. Capitol building. The shocking and horrifying images of the January 6 deadly riots and attack upon the Senate proceedings confirming President Biden’s electoral college victory will long be remembered as a dark day for our country. From a purely financial perspective however, we believe markets are now looking beyond this ugly episode and appear to be focusing on potential virus and economic solutions in the months ahead.
COVID-19 cases and fatality trends continue to rise rapidly. Though vaccines appear seemingly within reach for millions, the tragic numbers of infections and fatalities continue to increase almost exponentially and will likely continue to do so in the weeks ahead. In addition to the human tragedy induced by the second wave, potential business restrictions and closures will likely hinder 1Q economic growth and could lead to downside market volatility in the early months of the year, particularly as initial vaccine distribution efforts have fallen behind schedule.
Investors anxiously await new rounds of fiscal stimulus potentially playing a key role in bridging the gap between now and wider vaccine distribution. With a new Democrat majority in the Senate now at his side, President Biden has announced bringing forward the “American Rescue Plan,” a $1.9 trillion economic stimulus package focusing on immediate financial relief to individuals and families, assistance to local governments and small businesses, and pandemic response efforts including the national vaccination program. While the dollar amount and specific provisions of this soon-to-be proposed legislation will need to be approved by Congress and are subject to change, plans are already in the works for a second stimulus package, perhaps in February or March. This provision is expected to deal more directly with economic factors such as job creation and infrastructure spending. We view this higher-than-previously anticipated fiscal stimulus as favorable to the markets and potentially a crucial bridge to wider spread vaccine distribution later in the year.
This additional fiscal stimulus is needed, as the economic recovery appears to be slowing into 1Q21. As these fiscal stimulus plans potentially head toward implementation in the near future, it is clear the pace of economic recovery is slowing. Early economic data so far have displayed job losses of 140,000 for the month of December and the second consecutive month of negative retail sales growth. We believe as COVID-19 cases continue to rise, 1Q21 could be a very challenging quarter and potentially even fall back into negative GDP growth. While this would likely be temporary as the economy waits upon stimulus and vaccine distribution to filter through later in the year, a short-term economic downturn could still have market impacts. Given the strong recent performance in the equity and credit markets, we believe this could result in downside risk to stocks during the early months of 2021.
Potential new entrant could broaden vaccine supply. While the initial distribution of Pfizer and Moderna COVID-19 vaccines have hit early bottlenecks, vaccine supply could be enhanced in upcoming months by the potential launch of Johnson & Johnson’s (JNJ) vaccine candidate, which is expected to release Phase III clinical data perhaps by the end of January. With a single-dose regiment and favorable storage profile, this new vaccine could meaningfully improve overall distribution expectations should its efficacy prove comparable to Pfizer and Moderna’s.
Favorable longer-term market dynamics and catalysts remain in place. While the early months of 2021 could see downside activity in stocks and credit-oriented bonds, we believe equity markets remain well positioned for the latter part of the year and beyond based in large part on the following:
- Strong economic and corporate earnings recoveries in 2H21 as vaccines achieve wider dissemination
- Additional fiscal stimulus enabling consumers and corporations to weather the months prior to broad vaccine distribution
- Continuing lower-for-longer short-term interest rate environment
- Ongoing monetary stimulus from the Fed in the form of open market large-scale asset purchases
- Reasonable stock valuations when comparing earnings yields to longer-term interest rates
- We maintain a year-end price target on the S&P 500® of 4,200
In these early days of 2021, investors have witnessed the continuing rage of the worst pandemic in a century, frustrating delays on the dissemination of recently approved vaccines, and a mob assault upon the U.S. government — yet the markets continue to look forward. So while there could be some rough patches and downside volatility between now and springtime, we continue to believe the longer-term opportunities remain attractive as we look ahead to the latter parts of the year.
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