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December 04, 2020 at 02:45 PM
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As COVID-19 cases spike globally, in the United States the combination of aggressive stimulus, new vaccines and positive economic data leave more room for equity market optimism in 2021.
From an investment perspective, the road to U.S. economic recovery started with the massive fiscal and monetary policy responses back in March, which injected an unprecedented amount of liquidity into the economy.
According to Cornerstone Market Research, the stimulus amounted to 44% of U.S. GDP in total, compared with the 2008 crisis, in which stimulus came to 5%. Both globally and in the United States, more stimulus is coming — it’s just a matter of timing.
Positive Vaccine News
Though weekly jobless claims still are running high, positive COVID-19 vaccine news and solid economic indicators continue to roll in.
More than 70% of people in developed markets will be vaccinated against the coronavirus by fall 2021, according to a note from Goldman Sachs last week.
Approvals look imminent, as the FDA has meetings scheduled in the coming weeks to discuss emergency use authorizations for the Pfizer and Moderna vaccines. It’s also encouraging to see AstraZeneca and Johnson & Johnson with late-stage vaccines.
If expectations are correct, it means we as a nation can get back to some sort of normalcy — going out to eat, spending time at the mall and booking vacations — which will contribute to GDP growth. Note that consumer-driven activity is responsible for almost 70% of U.S. GDP.
Recent economic data show the spike in U.S. virus cases hasn’t stalled the recovery. U.S. purchasing managers’ data released on Dec. 1 showed steep improvement in operating conditions. The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index (PMI) posted 56.7 in November, up from 53.4 in October.
The improvement was the sharpest since September 2014, as the headline PMI rose for the seventh successive month. PMI has a strong correlation to corporate profits; when it rises, we can expect corporate profits to increase, which will boost stock prices.
Last week, the Chicago Fed’s national activity index, which gauges overall U.S. economic activity, rose to 0.83 in October from a revised 0.32 in the prior month. October’s increase was the first gain in four months, suggesting a good start to the fourth quarter.
At the same time, home prices are rising broadly across the United States, a sign of consumer confidence. The latest S&P CoreLogic Case-Shiller 20-city home price index showed that home prices rose 6.6% in September from a year earlier — much higher than its 5.3% increase in August — for the biggest increase since April 2018.
In another sign that the market is pricing in a recovery, copper prices are trading at seven-year highs, boosted by expectations for more global stimulus, continued industrial demand and rising inflation. China-led demand has already impacted prices; Chinese imports of refined copper and products have increased a remarkable 41% this year.
