Investor optimism around vaccines and stimulus may have peaked
DEC. 21, 2020
Equity markets are starting the week on a negative note, trading down from record highs on worries over a new Covid strain in the U.K. and the prospect for incremental lockdowns. Congress reached a deal on the elusive fifth coronavirus deal, though investors seem poised to treat it with a “buy the rumor, sell the news” mindset.
Record equities continue to concern observers, with several asset classes echoing trends from the late 1990s. The recent surge has been broad based, bringing global equity values across the $100 trillion threshold, with intense focus on wild moves in IPOs which have raised a record $175 billion this year and a flood of SPAC fundraising. Investor positioning is reaching excessive levels, with a record 22 million call options traded daily over the last month. The Bank of America Global Fund Manager Survey showed respondents are underweight cash for the first time since 2013 and are the most bullish on stocks and commodities since 2011.
The S&P 500® Index is currently up 15% this year with two weeks remaining, which would be the 33rd best year in the 93-year history of the index. Global interest rates remain extremely low despite increased issuance, with $18 trillion in negative yielding debt globally, including $3 trillion in corporate bonds. Credit spreads are at their tightest level since before the outbreak.
Congressional leaders finally came to an agreement on a $900 billion coronavirus relief bill, which now faces a vote in the next day, along with a full-year spending bill. The plan includes direct payments of $600 for most adults and $600 per child, an additional $284 billion in Paycheck Protection Program, $300 a week of additional unemployment benefits through March, an extension of the eviction moratorium through January, and assistance to renters, schools, vaccine purchases and testing. The package does not include additional state and local government funding or liability protections and rescinds $429 billion in unused CARES Act funds allocated for Fed lending and prevents the Fed from cloning expiring credit programs.
Warning signs continue to rise on the economic impact of the second wave of shutdowns, with weekly jobless claims unexpectedly hitting the highest level since early September. Retail sales fell for the second straight month, with broad weakness led by clothing stores (-6.8%), restaurants and bars (-4.0%), electronics (-3.5%) and auto sales (-1.7%). Online and mail order, which had been bright spots, slowed to 0.2%. The NY Fed’s Weekly Economic Index has weakened for the last two weeks, suggesting a softening of high-frequency data points. Despite the choppy recent data, the Fed raised its expectations for growth, to -2.4% in 2020 from a previous estimate of -3.7%, and growth of 4.2% next year, ahead of the previous forecast of 4.0%.
Moderna received emergency use authorization for their vaccine, putting the U.S. on track to ship 7.9 million doses this week, including 5.9 million from Moderna, and is on track to deliver 20 million doses by year end or the first week of January. Johnson & Johnson could get emergency use authorization for their vaccine next month. Investors, however, are focused on worsening infection trends, including a new, highly infectious strain that is spreading across the U.K., leading to increased lockdowns and travel restrictions.
What to Watch
Volatility is often elevated during Christmas week, with light trading volume and an early bell on Thursday and no trading on Friday. Economic data include revised third-quarter GDP on Tuesday, PCE deflator, consumer sentiment and new home sales on Wednesday and durable goods on Thursday.