Market Strategy 12/21/2020

Key Takeaways

• As we went to press on Sunday night, news crossed the transom that Congressional leaders reached a deal on a roughly $900 billion economic rescue package for the US economy. The agreement augurs well for the economic outlook and for equity market performance in a holiday-abridged week.
• The news of the approval of a second vaccine and its launch this week In the US is likely to further improve sentiment in the markets this week.
• The recent weakening of the US dollar has substantially improved returns for US investors in foreign stocks. Prospects for a global economic recovery in a post-Covid environment could further enhance returns going forward.    

The US equity markets as a discount mechanism (pricing the value of stocks in the future) have pushed major stock indices higher on a year to date basis than many investors and observers would have thought possible in March of this year when Covid-19 became broadly recognized as a pandemic by government officials in the US and around the world marking the start of shutdowns across large segments of the world economy.

But here we are some nine months later with the launch of the first vaccine approved stateside last Monday, another approved over the weekend to be launched this week with more to follow over the next few months. According to the Centers for Disease Control and Prevention (via Bloomberg) so far 556,208 doses of vaccine have been administered in the US. Some countries outside of the US were already in process of inoculating segments of their population and more are expected to join the process over the course of the next few weeks and months. As awful as the pandemic has been in terms of lives lost, illness endured, as well as its costly disruption of the US and world economies its overall effect has touched so many people that a level of broader acceptance and inoculation may very well be achieved than had been earlier projected by health authorities. Wide acceptance and usage of the vaccines could well help accelerate and propel the economic recovery that is likely to follow and has begun to be priced into equities in bourses around the world.

Advancements in technology, biotechnology, pharmacology, diagnostics and equipment have enabled the start of this process at what the current administration in Washington has coined “warp speed” in comparison to vaccines developed to stem the spread of other viruses in prior centuries and decades when vaccines of great efficacy could take decades for medical research to arrive at.

Two medical professionals in private practice that we spoke with just last week attributed technological advances achieved in the past few years for a process that has been able to deliver a vaccine capable of stemming the spread of Covid -19 in such a short time span— in a period of months rather than what has been the norm—years even decades.

Such progress in medicine has helped boost investor sentiment and expectations with some consideration to what effect the vaccine(s) may have in accelerating and securing the process of reopening the stateside economy, and generating economic growth that could revive segments of the economy (particularly in services and leisure including hotels, airlines, entertainment and office buildings among others) that have yet to recover from the pandemic’s wrath.

Monetary policy by the Federal Reserve which remains consistently supportive of a challenged economy along with the next round of fiscal stimulus tentatively agreed on by Congressional leaders broadly supports equity prices at these levels and also suggests that there is further upside ahead notwithstanding the emergence of catalysts that could appear intermittently to cause short-term nervous investors, bears and skeptics to take some profits intermittently.

As stocks have rebounded this year since the low on March 23rd and pushed higher through the fourth quarter this year many investors wonder how long stocks can stay on track in an upward trajectory leading toward what has been coined by some as “the next normal.”

Their question reminds us of the title of a classic jazz tune from the early 1940s titled, “How High the Moon?”

We reply that trees and stocks don’t rise to reach the sky but in bull markets and in bull runs often appear intentioned to do so. The bull market that rose like a phoenix from the low on March 23rd of this year similar to its predecessor (the bull market that emerged from the Great Financial Crisis low of March 9, 2009) is broad in scope and global.

While there are segments of the markets (including “story stocks,” some IPOs, and cyber currencies) that exhibit levels of animal spirits and speculation, a process of rotation and rebalancing points to a wide selection of stocks that trade at more sensible valuations while still offering significant opportunities for investors. A broadening of investor appetite not just for growth but for value stocks as well as a resilience in equity prices and improved revenue and earnings trends suggest to us that this bull market has further to run.

As always it remains important for investors to keep things in perspective, right size expectations, practice diversification and patience and know what you own and why you own it and hold reasonable expectations of how those investments you own will perform as the US and world economies transition towards “The Next Normal.”