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Stimulus and vaccine optimism continue to drive markets

December 14, 2020

Thoughts

  • Equity markets are set to rebound to near-record levels on Monday on heightened optimism for a fiscal stimulus deal and the beginning of vaccine distribution. Last week, markets took a breather following an impressive 13% rally for the S&P 500® Index since the beginning of November. The broadening of market strength continues, with the Russell 2000 and the MSCI Emerging Market indexes now outperforming the S&P 500 this year.
  • Wall Street strategists are providing an optimistic picture for 2021 market returns. An average of 11 large banks shows an expectation for a 10% gain next year, with JPMorgan the most optimistic (+22%) and Bank of America the most subdued (+3%). At this time last year, the average estimate for 2020 was 3,283, which would have been a gain of just 2% from 2019 and is 10% below the current level despite unprecedented disruption.
  • Market valuations continue to attract attention, with the 22x price-to-earnings ratio for the S&P 500 at the highest level since the technology bubble, reflecting the risk-on approach of investors. Specifically echoing the frothiness of the late-1990’s is IPO valuations, which relative to sales this year are at their highest in the past two decades at 24x, compared with roughly 6x over the past decade, though half the peak of the dot-com bubble.

News

  • A fiscal stimulus deal is gaining momentum, with a bipartisan group of lawmakers set to unveil a $908 billion plan on Monday. The deal would be executed in two separate bills to address the contentious issues, with a $748 billion bill that spending in areas that have broad support, and a $160 billion bill that includes state and local aid and liability provisions. The agreement doesn’t have checks to individuals but extends enhanced unemployment benefits. There is a competing $916 billion plan favored by the White House, which while similar in size, is quite different in allocation.
  • The vaccine developed by Pfizer and BoiNTech began shipping following the approval of the emergency use authorization (EUA), with Pfizer planning to ship 50 million doses this year. Moderna is set for an advisory panel meeting Thursday that is likely to grant their vaccine an EUA, potentially resulting in 20 million doses this year.
  • The IPO market is again in focus following successful launches for DoorDash and Airbnb last week, with Airbnb worth more than Marriot, Hilton and Hyatt combined. Combined, the two companies were worth less than $40 billion in the private market and are now valued at $170 billion. To date, there have been 203 IPOs this year raising $75 billion (both highest since 2014), with the Renaissance U.S. IPO index up around 113%. M&A activity is accelerating, with deals announced by AstraZeneca, Huntington Bancshares, Electronic Arts and one likely with State Street, reinforcing that IPO and M&A trends are reflective of late-cycle behavior by managements while we are technically early cycle.

What to Watch

  • An FOMC meeting Wednesday is unlikely to result in any policy shifts, though the commentary could move markets. Economic releases include industrial production on Tuesday, retail sales and PMI data on Wednesday, housing starts on Thursday and leading indicators on Friday.

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