Stocks drifted higher last week amid a light news period. Earnings season got off to a so-so start. Results generally matched expectations but forward looking guidance was cautious. Interest rates remained within a tight band. Perhaps the best news was the strong September retail sales figures. Those, however, are at risk without further stimulus.
Earnings season begins in earnest this week. By the end of next week, over half of the S&P 500 companies will have reported. Results, once again, should exceed expectations. At the same time, managements will be very cautious regarding forward looking statements given the election and uncertainties related to Covid-19.
Nancy Pelosi has also told White House negotiators that if they want the next stage stimulus bill passed before Election Day, an agreement has to be reached by tomorrow. Between Supreme Court confirmation hearings and the need of members of Congress to go home to campaign, there simply isn’t much time left. An agreement won’t be a major one-sided victory for either party. Both will claim credit. The Senate is scheduled to take up a $500 billion Republican bill tomorrow, but that has no chance of gaining House approval. At the same time, it is uncertain whether Leader McConnell can gather enough Republican votes to pass any agreement negotiated by Speaker Pelosi and Treasury Secretary Mnuchin (with obvious White House approval). Without a deal, there won’t be any stimulus before December, or more likely, late January. That would leave a lot of Americans out on a limb over the holiday season. Most put small odds on an agreement being reached, but in Washington stranger things have happened at the last minute. If a deal is reached, it would be a boost to the market.
Investors seem comfortable with the prospects of either Joe Biden or Donald Trump winning the election. Biden is viewed as the bigger spender. He could possibly structure a much needed infrastructure bill. Trump is a known quantity. Any stimulus bill would be smaller. But one is almost certain to pass, perhaps a lot closer to the Senate version than Democrats would like. Besides emergency legislation, another Trump term would be characterized by gridlock. The House and Mr. Trump see eye-to-eye on virtually nothing. Ms. Pelosi and Mr. Trump don’t even talk. She uses Mnuchin as her White House proxy on economic matters. While many fear Biden will move left as President, the reality is that if he wants to get anything done, he will have to move right toward the center. $3 trillion annual budget deficits are unsustainable. Debt-to-GDP is now over 100% for the first time since the end of World War II. The more Democrats want to spend, the more they will have to raise taxes. There are limits to both. Despite campaign rhetoric, every member of Congress knows that a vote to raise taxes costs future votes. Taxing millionaires more is one thing, taxing the middle class is another. If Biden wants to satisfy a progressive agenda, he will have to tax the middle class despite all his campaign assurances. Thus, a sane conclusion is that spending beyond what the pandemic requires will be limited.
That brings me to the pandemic itself. Cases are rising around the world. Despite news headlines, the extremes are limited at the moment to a few countries and to a few areas within those countries. The biggest problem for public health officials is pandemic fatigue. We are all tired of being constrained. We are all tired of standing in line, wearing masks, and being forced to stay away from our families and friends. The longer we stay healthy, the more likely we are to let down our guard and cheat a bit. That leads to rising cases.
Cold weather and school reopenings don’t help. But so far, the rise in cases has not been matched by the rise in hospitalizations or deaths. That seems like good news. Most of the increase in cases has been for those below 30 years old. They are less likely to require acute care. That’s also good news. But this remains a virus with nasty consequences, and if cases continue to rise, hospitalizations and deaths will follow. Then the issue becomes what government response, if any, ensues. To date, there has been little. Bars have been closed in some areas. In a few hot spots, restrictions have been reinstated. Israel just completed a 30-day lockdown. But it is still too early to claim victory or defeat.
The virus, however, may be having political consequences. The White House, plagued by these consequences as case counts continue to rise, seems to be doubling down on the idea that masks are of limited value and that, perhaps, opening everything and letting herd immunity resolve the virus are better approaches. That stance has its adherents. But it doesn’t sit well with seniors or mothers, two important voting blocks. Perhaps that is why races in states like Florida and Arizona, two states with large senior populations, have tightened. I am not in the election predicting business, but it is safe to say that the inability of public health policy to get on top of Covid-19 works against the incumbent and, therefore, is an important election factor as we enter the last two weeks of the campaign.
This week there will be a CDC virus panel and it is quite possible that good news will be presented by Pfizer and Moderna that could lead to an approval for emergency use by the end of November. With that said, a full approval probably is a Q1 2021 event, and given that two doses are required, it is unlikely that a significant number of Americans will gain immunity from a vaccine before mid-year. As for therapies, the closest ones, antibody therapies from Regeneron and Lilly, won’t be broadly available until early-mid 2021 at the earliest. Both are infusion therapies, unpopular options for many Americans. They are most effective given early in the course of the virus. That raises the question of how many Americans with less than acute symptoms will want to visit a hospital emergency room for a three-hour infusion.
What this all suggests is that if past is prologue to the future, Covid-19 will run its own course before broad vaccines and therapies are available to mass populations. Both could help in the second half of 2021, and both could help to dampen prospects for any resurgence beyond. But most of the economic damage is likely to have already happened by the time vaccines and therapies are broadly available.
My guess is that the market sees this. That is why stocks of companies most affected by the pandemic, like airlines and hotels, have had only muted recoveries to date. But if stocks look 6-9 months ahead, some of the virus’s most severe economic victims may start to recover over the next few months. With that said, economic losses and massive additional borrowings needed for survival have taken their toll. Airline economics in 2022 will be far different than in 2019, courtesy of almost $100 billion in additional debt. It took banks more than half a decade to begin to recover from the Great Recession. It could take as long for Covid-19 victims to achieve full recovery.
Joe Bryant, former Sixer and Kobe’s father, is 66 today. John Lithgow is 75. Michael Gambon turns 80.
James M. Meyer, CFA 610-260-2220