Good morning, and welcome to 2021. Stocks ended 2020 on a high note, reaching new records once again on the last day of trading. Over the weekend, there was little in the way of new economic news. The front pages were filled with political news in front of this week’s runoff election in Georgia, and the meeting of Congress Wednesday to confirm the Electoral College results. President Trump and allies are still trying to disavow the election outcome, but efforts this week are likely to create fodder for media news networks without having any impact on financial markets. The Georgia runoffs are too close to call. Should Democrats win both races, they will gain control of the Senate agenda. If they lose one or both, at least two years of gridlock is the likely outcome. The other major headline story remains the coronavirus. The parabolic rise in new cases seems to be leveling off, a sign that perhaps the fall surge is running its course. But the economic impact will remain for a few more months at least.
This will be a big week for economic data. Today we will get manufacturing and construction numbers. Over the course of the next several days we will get a better picture from retailers and other data trackers as to the strength of the Christmas selling season. Thursday, we get weekly jobless claims. They fell last week in a holiday-shortened week, but remain at 3-4x normal levels experienced before the pandemic. A lot of temporary seasonal jobs have ended or will end shortly. The $600 stimulus checks are starting to go out, providing some offset. Friday, the December employment report will detail whether economic progress, post the spring lockdown, will continue.
As we say over and over, markets are forward looking. The vaccines are rolling out. Front line healthcare workers and nursing home residents have largely received a first dose. While the rollout is slower than the government predicted (which should be no surprise), it is accelerating a bit and seniors are now starting to receive injections. It remains a conservative expectation that everyone who wants to get vaccinated will be able to get at least their first shot by the end of the second quarter. Combined with an expected seasonal slowdown in new people contracting Covid-19, this should lead to a solid reopening of those businesses that remain locked down or restricted to limited capacity.
The media loves to raise fear levels; that’s how they attract readers or viewers. After a heavy rain, the TV news will show the one car stranded in deep water. In today’s Covid-19 world, the view is of crowded hospitals, if not worse. But the reality is that while our healthcare system is strained, it isn’t broken. People who need medical attention are getting it. As more Americans are vaccinated and the virus counts wane with warmer weather in early spring, the worst will be history. I don’t know whether the surge has already peaked or whether the peak is several weeks away. But it isn’t months away and that will be pretty news to equity investors as the year begins.
It is hard to imagine a full football stadium next Fall while watching cardboard cutouts in the seats today. But successful investors look ahead, not at today’s news. One needs to constantly be thinking about tomorrow’s headlines, not today’s.
That also explains why most of the political news dominating the headlines today is meaningless to investors. There will be a circus in Congress beginning on Wednesday, instead of the formality of endorsing the Electoral College vote. But it will fade quickly. Even the Georgia runoffs are less meaningful than presented. Yes, if Democrats win both races, Chuck Schumer would become Majority Leader and Democrats would set the agenda in both chambers of Congress. But setting the agenda and passing legislation are vastly different. It is unlikely that 50 Democrats will be in universal agreement on all but a very few agenda items. President Biden’s first task is to heal the nation, physically from the virus, and emotionally from the chaos of the last four years. He isn’t about to lead with some of the conspiratorial issues like expanding the Supreme Court or changing Senate rules. Might he put forth some tax change suggestions in his State of the Union Address? Most likely he will. But all Presidents use that address to lay out a wish list, most of which never turns to law.
We are looking at an impending Congress with a bit of disarray on both sides. The Democrats will have to deal with a tension between Progressives and Moderates. While in some cases the moderate position will sound pretty progressive, there is a wide chasm separating the boundaries of the party. It will take time to find common ground. Given the narrow majorities that will exist in the new Congress, if that common ground doesn’t cover almost all the Democrats, getting anything significant passed into law will be difficult. As for the Republicans, they have to decide who dictates their agenda. President Trump may leave the White House on January 20, but his Twitter is virtual. He thrives on chaos and attention, and will do his best to churn the waters and make himself the focus. Republicans will have to decide whether loyalty to Trump lasts well beyond the 20th or not. Say what you will about the President’s behavior, but he commands a large block of support, and few want to antagonize that block. That leaves unclear how cooperative Republicans will be trying to carve a center bipartisan majority for any significant legislation, versus staying loyal to Trump and being obstructionist until the mid-term elections.
Wall Street doesn’t have different answers than Main Street. But investors can discard the media-driven hysteria and focus on expected realities. Reality suggests that any significant legislation that will move the economic needle will follow an arduous and time consuming path. At this point, we only know the outline of Biden’s wish list. The jump to any conclusion as to what becomes law and when is a leap of faith that won’t entrap most investors.
The last piece of the puzzle, the actions of the Federal Reserve, are the easiest to predict, at least in the short run, because the Fed has spelled them out. Monetary policy will remain very accommodative until inflation is persistently well over 2%. That won’t happen in the first half of 2021 and it may not happen for several years. Thus, low interest rates, an improving economy, and less political tumult sets a nice backdrop for markets. The only serious headwind is valuation. Most of that concern is concentrated in the speculation corner of markets centered around new issues and concept stocks. Those already started to look tired as 2020 ended. My guess is that early leadership will be concentrated on cyclical names that will benefit the most from a waning pandemic, and leadership growth stocks that moved sideways in the fourth quarter of 2020.
Today, author Doris Kearns Goodwin is 78.
James M. Meyer, CFA 610-260-2220