“It’s tough to make predictions, especially about the future.” — Yogi Berra
Fourth Quarter Summary
Global asset markets continued their turbulent ascent in the Fall of 2020. Both American and international equities rose sharply and commodities such as copper and oil also rallied. The dollar, U. S. Treasuries and other safe havens went lower. Cyclical and value stocks outperformed growth stocks such as the FANG group (Facebook, Amazon, Netflix and Google) after a long hiatus. This capped a year that saw very good returns, following periods of volatility and an early 30% pandemic-induced plunge.
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Covid-19, New Vaccines and a General Election
Economic growth moderated in the fourth quarter due to increasing Coronavirus cases worldwide. This included cities, states and countries that previously skirted the crisis, along with those experiencing a second phase of the illness. The situation continued to deteriorate as the weather got colder and larger holiday gatherings ignored recommended social distancing and mask wearing. According to medical experts, January may be the worst month yet, followed by a gradual improvement until the end of winter.
Fortunately, new vaccines by Pfizer/BioNTech, Moderna and AstraZeneca were announced in November. The first two vaccines were quickly approved while AstraZeneca vaccine, already widely used in the UK, is currently under review by the FDA. Others may follow, including one from Johnson & Johnson.
It is encouraging to note that the efficacy or success rate of the vaccines is very high, with the Pfizer and Moderna vaccines at about 94%. Also reassuring is the speed of the development. All three vaccines were developed in less than a year. Overall, this news marks a turning point in the battle against Covid-19 and signals the beginning of an eventual end to the pandemic.
After a contested general election, former Vice President Joseph Biden was elected President. Democrats also took effective control of the Senate, with victories in two Georgia runoff races held in January. There is a razor thin Democratic majority in the Senate now with 50 Democrats and 50 Republicans, allowing new Vice President, Kamala Harris, to break any tie votes. Additionally, Democrats maintained control of the House of Representatives, but lost several seats and have a slim majority there as well.
Another Fiscal Stimulus Bill, Other Possible Legislation and Obstacles
The incoming Administration is advancing the idea of a $1.9 trillion fiscal stimulus proposal with $2,000 checks to households. Other features include expanded unemployment benefits, rental relief, aid to state and local governments, and an increase in the minimum wage to $15 an hour.
After the stimulus package is passed, the Biden legislative agenda will include a wide-ranging tax overhaul program, with tax increases on corporations and people with incomes over $400,000, along with a restoration of federal deductions for state and local taxes. Also on the agenda is an infrastructure plan, a health care measures to cap drug price increases, and regulatory edicts including green energy and immigration.
Although the Democrats now control both the White House and Congress, getting legislation passed will not be easy. As mentioned earlier, very thin majorities in both chambers of Congress may hinder and even prevent very aggressive proposals from being passed, with moderate Democrats like Senators Manchin and Tester holding out for more modest changes. Revenue or spending-related measures can pass with a simple majority using the so-called reconciliation process, but non-fiscal items require a 60-vote requirement in the Senate.
The situation is complicated by our current bifurcated economy. Some sectors and individuals are doing well and don’t need help. Others, especially those related to leisure and hospitality industries, are suffering and need immediate assistance to prevent evictions and bankruptcy. The problem is especially prevalent among many small businesses that do not have the “deep pockets” that most larger companies possess.
The Outlook
- A fiscal stimulus bill, along with continued Federal Reserve accommodation will support the economy and the markets until Spring, when warmer weather will arrive and dampen the transmittal of the Covid-19 virus.
- A successful rollout of the vaccination effort will help ensure an end to the pandemic. So far, the implementation has been slow but improving. Hopefully, by mid-year a large portion of the population will be inoculated returning life to a more normal state, with activity picking up for the most pandemic-affected areas of the economy.
- We maintain a moderate overweight in equities and will add to international emerging markets while underweighting fixed income.
- Although yields for shorter maturities are anchored by Fed policy, longer maturity yields should drift higher as the economic recovery accelerates.