By Tim Courtney, Chief Investment Officer
As we approach the final months of the year, 2020 has at least one more parting shot for us: a spike in COVID-19 cases. There is no doubt that infections are sharply rising in the U.S. and across the globe.1 Even if states don’t go back into a full economic lockdown, this could cause a significant portion of the population to curtail plans and spending activity. It would be an unwelcome slowing of the momentum that started in the third quarter.
Thankfully, there is some good news that may help the market weather a winter case spike. First, case fatality rates continue to fall2 as we learn more about the virus and treatment strategies improve. Additionally, it is now almost certain that another round of stimulus will be coming in the next several months.3 This should help keep household finances afloat and consumer confidence steady. October manufacturing and new orders were surprisingly strong, showing that the third-quarter recovery still has a good amount of strength.4
Probably the biggest news that has moved markets this week has been the clearer path toward a vaccine. Earlier this week, Pfizer and BioNTech announced their version of a vaccine was more than 90% effective in preventing COVID-19 for those without evidence of prior infection.5 This news precipitated a large move higher for stock prices of smaller and more economically sensitive companies.6 Of course, a vaccine will not eliminate the health risk of the virus and many people may not be comfortable immediately using a vaccine. However, it will be a big step in rebuilding the confidence of consumers and businesses and could help spur deferred spending and investments in 2021.
There is much room for improvement next year, as the economy is still about 4% smaller7 than it was at the beginning of the year even after third-quarter gross domestic product (GDP) came in at a stronger than expected 33.1% annualized rate.8 Expectations are for a healthy earnings recovery, with 2021 expected earnings very close to 2019 levels.9 The market mostly reflects this in current prices. This is a reminder that although earnings in 2020 will be poor for many companies, the bulk of a company’s value is based on future earnings that are still two, five, ten or more years away.
The economy has several supports that can help temper the impact of rising cases, but this surge could certainly slow momentum. This is one reason why market volatility measures remain elevated post-election.10 Ultimately though, at our household, company, state and federal levels, we all have bills to pay. So surge or no surge, the companies we’re invested in will continue working on adapting and being productive in providing the goods and services we all need.
1. CNN (11/9/20) — 10 million people have been infected with coronavirus in the US — and the rates keep rising in 43 states
2. NPR (10/20/20) — Studies point to big drop in COVID-19 death rates
3. CBS News (11/10/20) — What’s the status of a second $1,200 stimulus check?
4. CNBC.com (11/2/20) – U.S. manufacturing near two-year high in October
5. CNBC.com (11/9/20) — Pfizer, BioNTech say Covid vaccine is more than 90% effective — ‘great day for science and humanity’
6. CNBC.com (11/9/20) – Vaccine news unleashes new momentum in stock market as hunkered-down investors flee cash
7. Bureau of Economic Analysis (10/29/20) – GDP third quarter estimate
8. CNBC.com (10/29/20) — U.S. GDP booms at 33.1% rate in Q3, better than expected
9. Barron’s (11/11/20) – The S&P 500 can jump 20% by the end of 2021, Goldman Sachs says
10. Yahoo! Finance (data as of 11/13/20) – CBOE Volatility Index
Created by the Chicago Board Options Exchange (CBOE), the Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors’ sentiments.
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