It has been one of the best Novembers in 40 years, but last week stocks consolidated a bit. The market’s focus remains split between Covid-19 impact, the Presidential transition, and, of course, earnings and interest rates.
Let’s start with Covid-19. In the U.S. case counts continue to rise, as do both hospitalizations and deaths. As Thanksgiving and the Christmas holidays approach, there appears to be little sign of near-term optimism. Friday witnessed the second busiest day of airline travel since the beginning of the pandemic, although airline travel remains 60%+ below last year’s levels.
But let us cross the pond. In the spring, Covid-19 attacked Europe before it came to our shores. Italy and Spain locked down well before the U.S. They were about a month ahead of us. This fall, the new surge erupted in Europe before it came here. Why? Maybe it was the weather. I don’t know. But we can learn by watching what happens in Europe.
The good news is that the European surge appears to be winding down. In France, it is winding down quickly. New case counts that peaked a little over two weeks ago are back down to pre-surge levels. In Italy and the UK, it is less dramatic, more like rolling tops. Case counts are still elevated but they are no longer rising at a parabolic rate. They too appear to have topped, but it is too early to give the all-clear signal.
In all cases, the surges have been 4-8 weeks followed by a rapid decline. If I combine what I see in Europe with prognostications from epidemiologists in this country, case counts should top out reasonably soon in this country and then retreat. Pure math suggests a peak sometime in December. When will restrictions be lifted? That will be state driven. Certainly, there will be a lot of pressure to reopen schools shortly after Christmas break if case counts are moving in the right direction. There is little or no evidence that classrooms were super spreader events. But the final decision will be up to the mayors and governors.
At any rate, given that stocks look months ahead, the Covid-19 story is not going to have a stock market impact much longer. I realize the media, hungry for a “breaking news” story every night, may start most nights with a picture from an emergency room somewhere within our borders, but the economic reality is that the worst is probably upon us and the skies will brighten quickly in the months ahead.
That doesn’t mean there won’t be permanent residual damage. Restaurants and small businesses will close for good. Weekly economic claims remain elevated, reminding us that many are out of work. Congressional programs designed to support the economy during the crisis begin to run out December 31. There is very little chance Congress will do anything in its lame duck session.
Which brings me to my second point, the Presidential transition. While President Trump continues to wage battles in the courts, so far there is little evidence of fraud, certainly not enough to change the minds of judges or state representatives responsible for certifying the results. Mr. Trump’s legal team is trying to find a way to get the election to the Supreme Court. In 2000, a Supreme Court decision ultimately decided the election, but the court ruling at the time only impacted Florida. The fact that Florida’s results decided the election belies the fact that the court ruling was narrow and was related to ballot processing in a single state. Right now, there is no one state whose results were close that could change the outcome of the election should the Supreme Court issue a decision changing its results. Indeed, over the next several days as Pennsylvania, Michigan and others certify their votes, the legal window remaining for the President continues to shrink. Politically, all the rancor surrounding the validity of this election will take its toll. But economically, there is likely to be little impact.
However, as noted above, programs meant to support those injured economically by the pandemic are running out with little coming down the pike to replace them. Republicans soon will have to decide which path to travel. Will they continue to look to Mr. Trump for leadership and guidance? If so, the rancor will remain high for the next four years, and obstructionism will dominate efforts to pass any legislation including any further relief for Covid-19’s economic victims. But even if there are no more relief bills, and Congress decides not to renew Federal Reserve authorization for programs expiring at year end, the economy is likely to find a path forward as the pandemic fades.
With that said, near-term projections probably have to be reduced. 2020 Q4 growth was supposed to be about 10%. Now half of that would be a fortunate outcome. Depending on how long the current viral surge lasts, Q4 and Q1 of 2021 may be difficult economic times. But once again, the surge will end and the economy will recover soon thereafter, with or without further Congressional help. Obviously, if Congress and the Fed take more proactive steps, the rate of recovery would improve. But a year from now, it is unlikely that we will see any difference.
As for the transition problems we hear about on the news, as always, the media most likely is exaggerating the problems. The one drawing the most focus is vaccine distribution. Note that any distribution between now and Inauguration Day is limited and totally under control of the current administration. The lack of a smooth transition may be somewhat disruptive in the near term, but the line leadership trying to get vaccines to proper distribution channels has everyone’s health foremost in their minds. There may be a few more bumps than need be, but this is probably more a media exaggeration than a real substantive story.
Elsewhere, while the conspiracy theories continue, egged on by White House lawyers and parts of the media and social network sites, there is every reason to believe that the worst of the fervor will die down relatively soon. At some point, even Republican leadership will have to create some distance between themselves and Mr. Trump. Whether that some point is state certification of election results, the Electoral College vote, or the Georgia runoffs, is more a concern of the media than stock market investors.
Which brings me to the final point, earnings and interest rates. The recent signs that the pace of growth is slowing once again amid the most recent Covid-19 surge, sent yields on both 10-year and 30-year Treasuries back down a bit. As noted before, economic growth projections for the next two quarters are also being reduced. That may tweak the earnings outlook of some companies, but it will also ensure that rates remain anchored near zero for the foreseeable future. That is music to the ears of any investor in financial assets. The current modest slowdown will impact negatively the economic path forward for companies whose fortunes are tied to the pace of the virus. Travel and leisure activities will remain below par for longer. Some businesses simply won’t survive. Thousands of restaurants will close for good. But with so much money sloshing around, by 2022 at the latest new restaurants will open to take their places. Covid-19 has been destructive but not economically devastating. Most businesses will survive. Many will flourish. For a few, Covid-19 was even a positive accelerant.
Stocks may have paused last week, but as vaccines flow and case counts peak, I expect another wave into year end. 2021’s outlook is still hazy. Earnings will be much better. Heck, for at least three quarters, most companies will have easy year-over-year comparisons. But how stocks perform for the year will be dependent on where the 10-year and 30-year Treasury yields are at the end of next year. The “glass is half full” crowd says there is so much slack in the economy that no matter what the pace of recovery may be, interest rates and inflationary pressures will remain low. The “glass is half empty” crowd will see demand rising faster than supply, creating unforeseen inflationary pressures, higher rates and pressure on stock prices. It’s too early to hazard a logical guess. But this will be the battle of 2021.
Today, Miley Cyrus is 28. Good Morning America hostess Robin Roberts turns 60.
James M. Meyer, CFA 610-260-2220