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November 20, 2020

The Race Is On
David Hicks

Over the past few weeks, we’ve received some positive news about vaccine developments (notably Moderna and Pfizer).  Earlier in the week, stocks didn’t rally materially on the Moderna vaccine news, and we think that’s important to note as it shows that good vaccine news may already be priced into the market.

As we enter into the last month of 2020 (who’s ready for 2021?), the market is going to be focused on a few catalysts that could determine the near-term direction of stocks:

  1. COVID Cases – How bad it gets in the coming weeks
  2. Stimulus – When and how much

And, the race is on between COVID cases and Stimulus.

The outlook six months from now has turned mostly positive for stocks because of the vaccines, historic central bank stimulus, likely fiscal stimulus, and resilient corporate performance. But what we do not know yet is how much exploding COVID cases and increasing lockdowns will weigh on economic growth over the next few months. That matters because if it’s a lot, then that just leaves a larger gap for the economy to climb out of once the vaccine is distributed and life begins to return to normal.

A Good Scenario

If COVID peaks soon and if stimulus arrives early in 2021, the economic fallout could be minor. The likely market reaction would be that stocks are overbought in the very near term and are in need of consolidation, but on this type of new, we’d expect that consolidation to occur via a sideways chop as the figurative “hole” from which the economy would need to emerge would be relatively shallow. From a sector standpoint, value should continue to outperform growth and any short-term value underperformance should be an opportunity to add value exposure and lighten up on growth. Commodities (oil/copper) should rally while the dollar would likely be flat to modestly lower. We’d expect the 10-year yield to continue to an orderly drift higher, breaching 1%.

A Difficult Scenario

If COVID cases continue to surge through the holidays, breaching 200k-300k cases per day and resulting in moderate economic restrictions (say >2/3 of states institute some sort of economic lockdown), the market will find itself in some turbulence.

And, if stimulus arrives in late February/early March and is close to $1 trillion, we could see a 5%-10% correction in stocks broadly, led by value sectors (tech/growth would relatively outperform on a defensive bid).  Commodities (oil/copper) would drop on growth concerns, gold would rally modestly, while the 10-year yield would likely drift marginally lower, but nothing major.

This outcome would cause some unsettling short-term volatility, but we would not see it as a bearish gamechanger.

A Not-So-Good Scenario

If COVID cases surge above 300k/day and more states employ some sort of economic restrictions and the recovery essentially grinds to a halt, if the stimulus is delayed until March and comes in well under $1 trillion (closer to $500 billion), the market could some painful contractions.

This type of explosion in COVID cases would cause the economy to grind to a quasi-halt, which no one is expecting right now. Stocks could drop sharply led by cyclical/value sectors. Vaccine hope and Fed backstops would keep the losses from getting out of control, but the declines would be painful nonetheless. Growth/tech could relatively outperform but still decline. Commodities (oil/copper) would get hit very hard on growth concerns, while gold would rally on a fear bid/lower dollar. The 10 -year yield would decline sharply, likely back between 0.50% to 0.72%.

The Bottom Line

Regardless of the endless “what-if” scenarios, it’s important to stick to your long-term investment plan and not let headlines, fear, greed or emotions get in your way to achieving your financial goals.  And, it goes without saying that it’s been a difficult year, just don’t forget to see the good and be thankful for all of your blessings.





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