Economic Monitor: The Dawning of a New Era

BY: Mark Drachenberg

New beginnings can be fun. Think of getting married, having a baby, starting a new job, or moving into a new home – all very exciting times to celebrate. Perhaps we're now approaching another: the recent news concerning coronavirus vaccines is highly positive and could signal the beginning of the end of the virus as a dominant force in our lives. Yes, the road to normalcy is still a long one, but these developments offer a glimmer of hope heading into the New Year, and for that, we should celebrate – the markets certainly have been!

November was a very strong month, in terms of market performance. In fact, all major equity averages increased by double digits! The S&P 600 index (small-cap stocks) led the way with an 18.17% gain, while the S&P 500 index brought up the rear with a paltry 10.95% gain. All are in the green for the year, as well. On the fixed income side, the Barclays US Aggregate Bond Index added about 1%, bringing its YTD return to 7.36%. As of this writing, the markets are continuing to rally, but whether that continues will depend on virus-related factors (i.e., further vaccine developments, more fiscal stimulus from Washington, a more fulsome opening of the economy, etc.). 

The new era we may be entering seems much like the one we were on track for, pre-pandemic. Back then, some were calling for the S&P 500 to trade at 3,650 by year-end, which would have been about a 13% gain from where it started the year. Where is the index today? 3,670! However, the path that led us here is not one any of us foresaw in February. With all the shutdowns, restrictions, and closures, it felt like we were in the midst of a deep recession; to some degree, it still feels that way. Getting back to “normal” seems almost a novel concept, but get back to normal we will.

Case in point: the number of travelers that have preliminarily signed up for “test” runs of cruise ships. Expecting hundreds, operators have instead seen thousands interested. The pent-up demand may cause a major spike in bookings and activity for travel companies, which may, in turn, lead to increases in both the share prices of these companies and the prices consumers will pay to utilize them. Just think what will happen at Disney World when it fully opens – especially in light of its 50th anniversary later this year. All the savings from the stimulus packages may flood out into the economy in a hurry.

There are some potential roadblocks though. The next few months will still be challenging, given restrictions on travel, entertainment, and restaurants. Virtually everyone agrees that further stimulus is necessary to keep businesses in these sectors afloat and allow people to pay their rent & utilities, and put food on their tables this winter. The problem is, there is no consensus in Washington as to the amount and structure of whatever package gets put together. There seems to be some agreement on additional unemployment aid, a furtherance of the Paycheck Protection Program, and funding for testing. Regarding state and local aid and direct payments to individuals, well, that's a different story.. If there is a long delay in rolling out further stimulus, the economy will likely slow down; if not, its benefits will help buoy the economy until spring and the likely widespread distribution of a vaccine. 

As the vaccines are applied to a greater number of people, the restrictions we face should ease, if not lift entirely. Many economists think that, with a vaccine, the economy should largely have the pandemic in the rear-view mirror by summer and be fully past it by fall. If that ends up being the case, the pent-up consumer demand described above will drive equities to higher highs, and many predict a mid- to high-double-digit advance for equity markets in 2021. While that remains to be seen, especially given elevated stock prices already, the outlook is positive!   

As we continue our march toward the holidays and New (hopefully better) Year, we will continue to analyze the economy, the election (the Georgia Senate runoff elections will have an impact on everything from regulatory issues, to taxes, to whatever stimulus package is passed), and the effects of the virus on the markets.

As always, our approach has not changed, and we continue to seek out opportunities that provide a balance between protecting the downside and capitalizing on growth potential. We are here and available to discuss your portfolio or any other issue you may have. Please reach out to me or an member of our Wealth Management team (608) 826-3570 today. We look forward to speaking with you.

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