Well there’s the path and the destination. Over the last couple weeks the destination has become a little clearer. Possibly three vaccines approved by year-end if we don’t count the Russian and Chinese versions. Distribution to high risk individuals/professions by the middle of 2021. Maybe widespread distribution by this time next year. Of course, there are a tremendous number of assumptions in this view, but it seems we are moving in that general direction.
However, the path towards this destination is as murky as it has been in a long time. The chart below is staggering.
Hospitals are struggling, renewed lockdowns (and now curfews??) are prevalent.
As you would expect, the economy is struggling with the surge in infection rates. Simple mobility statistics shows a slowdown, as you can see below.
The latest retails sales data was soft, albeit still positive.
And first-time unemployment claims ticked higher for the first time in five weeks.
Growth is going to be weak until the spring. JP Morgan’s view seems spot on:
“JPMorgan economists now see an economic contraction in the first quarter due to the spreading coronavirus and related restrictions being imposed by states and cities. They project that the first quarter will contract by 1% after growth of 2.8% in the fourth quarter. For the second quarter, they see the economy rallying and growth of 4.5% followed by a robust 6.5% in the third quarter.”
We’ve seen this movie before, though. The weaker the economy is, the more support over the short-term. At least that is how the market is viewing things for now. It is looking at the destination and not the path. And so far, human ingenuity is calming whatever fears the market has about the path. The table below from JP Morgan on the vaccine backdrop is impressive.
Of course, there are a whole host of questions surrounding any vaccines.
– It isn’t clear what exactly the efficacy of the vaccines is going to be.
– Claims are based on an interim analysis of Phase III clinical trials on a relatively small sample size (Pfizer, for example, had 44,000 people in their trail). We still don’t know if the vaccine will work when tested on a bigger sample size, or if the initial results will hold later on.
– All vaccines will have to go through a process of national-level approvals.
– Production and distribution. How many doses, how do you handle it (-70 degrees??), who gets it first, etc.
– Governments will have to convince their citizens to take the vaccine. A recent poll showed that only 58% of Americans are willing to take it. Other surveys are lower.
But you can’t discount the fact that simply having a vaccine in such a short period of time is unprecedented!!
But humans also have a unique ability to sabotage their best efforts. Take Treasury Secretary Mnuchin’s bright idea:
“U.S. Treasury Secretary Steven Mnuchin said on Thursday that key pandemic lending programs at the Federal Reserve would expire on Dec. 31, putting the outgoing Trump administration at odds with the central bank and potentially adding stress to the economy as President-elect Joe Biden organizes his administration. The announcement could signal potential trouble for the incoming Biden administration. Although the programs were not used extensively, Fed officials felt their presence reassured financial markets and investors that credit would remain available to help businesses, local agencies and even nonprofits through the pandemic downturn.”
Really? Take away business support before the crisis is over? Ummm, sour grapes?
This puts the ball back in the Fed’s court. They meet again December 15th and 16th. More economic weakness over the next four weeks probably means a bigger bucket of liquidity. It also makes it tough for the incoming Biden administration to raise taxes next year. The prospect of both in the months to come is keeping the markets focused on the destination rather than the path for now.
Charts We Found Interesting
1. If there is a hint of good news on the virus front it’s the fact that infection rates might have peaked in Europe.
2. One consequence of the pandemic is that global debt levels have soared. This is going higher.
3. Is it sustainable? Judging by debt service costs it is pretty sustainable, at least in the developed world.
4. The national housing bull market rolls on. Existing home sales are surging and inventory levels are plummeting. The ‘months of supply’ measure (red line below) is at the lowest level since at least the early 1990’s.
5. If you look at the weekly market stats things look pretty calm. Under the surface there have been some amazing moves, though. For example, last week witnessed the largest ever performance spread between the equal weighted S&P index and the capitalization weighted S&P index.
6. Along the same lines, we saw the biggest ever one-day gain in the value factor on November 9th.
7. If you think stocks are in a bubble, what will be the catalyst for a pop? At least historically it has been higher interest rates. Will it be something different this cycle if rates don’t move for months on end?
8. Kiwis still like their democracy. Americans – not so much.
9. You mean that’s not how they do it? Best cartoon strip ever, by the way.
Have a good weekend.
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