Are the Stars Aligning for 2021?

• “Fed Dove” Yellen to become Biden’s Treasury Secretary
• AstraZeneca joins the growing list of effective COVID-19 vaccines
• JP Morgan see $300B+ in large fund ‘rebalancing’

The market’s can’t put a foot wrong…

Hot on the news of Pfizer’s and Moderna’s 94%+ effective COVID-19 vaccines – today we had more positive results from British pharma giant AstraZeneca – and their Phase III study with Oxford University . Here’s the NY Times:  

An early analysis of data from late-stage clinical trials found that AstraZeneca’s vaccine was either 62 percent or 90 percent effective, depending on the manner in which the doses were given.

While the overall efficacy of the vaccine remains unclear, the encouraging preliminary results indicate that it has the potential to become a powerful new weapon in the war on the pandemic, which has killed more than 1.3 million people worldwide since January and is still spreading rapidly.

AstraZeneca said it expected to begin distributing the vaccine this year and that it would be able to make up to three billion doses next year. At two doses per person, that would be enough to inoculate nearly one in five people worldwide

The COVID-19 cavalry is certainly on the way.. 

And whilst the positive vaccine news from AstraZeneca was welcomed (and mostly expected) – the market was perhaps more enthusiastic by Biden’s nomination of Janet Yellen as Treasury Secretary.

Yellen – A Known Market Dove

Yellen was one four candidates widely expected to be nominated by President-elect Biden.

And from the market’s perspective – the choice could not have been better. 

From mine, this was a smart pick.

First and foremost – she is well known to the market after a long and distinguished career. 

The market knows exactly what it’s going to get.

Second, Biden also needs  someone in Treasury who will work seamlessly with the Fed. 

For example, today it’s fair to say relations between the Trump Administration and the Fed are strained at best (for e.g., with current Treasury Secretary Mnuchin recently refusing to extend the Fed’s emergency loan programs)

I don’t think this is the kind of decision (or attitude) we would expect to see from Yellen. 

I say this because Yellen is on record this year as saying “there is a huge amount of suffering out there”… and “the economy needs spending”

This kind of language echoes the sentiment of Fed Chair Jay Powell – who also strongly suggested the government needs to do more – saying there was “little risk of overspending” 

The market is aware the current fiscal response to the pandemic is virtually done…  with Congress unable to reach a stimulus (or relief) deal prior to the election.

Yellen told Bloomberg about a month ago that the US economic recovery will be weak and uneven unless Congress spends more to reduce unemployment and support small businesses. I quote:  

“While the pandemic is still seriously affecting the economy we need to continue extraordinary fiscal support but even beyond that I think it will be necessary”

And it’s this kind of dovish sentiment which drove the market’s advance today. 

The market knows more money is coming… a lot more.

However, what it needed was someone like Yellen to help spearhead this kind of deal through Congress. 

Now whether Yellen has the “political chops” to negotiate a deal through a (likely) Republican controlled Senate remains to be seen. 

But what’s clear to the market is both her intent and her strong (Keynesian) bias. 

Seasonally a Strong Time of Year

Trading is expected to be lighter this week with the Thanksgiving holiday this Thursday (and unofficially Friday). 

That said, the S&P 500 has posted a positive return from the start of Thanksgiving week through New Year’s Day 19 times in the past 25 years (76% of the time)

S&P 500 Return from Thanksgiving week through to the New Year – Source CNBC

As I’ve been writing recently – the market is looking past the various short-term headwinds like expected business shutdowns and record-high COVID-19 cases.  For now it (only) sees:

• Mass COVID-19 immunization towards the second half of next year (or before);
• $2-3 Trillion plus in fiscal stimulus early in Q1 – lead by a dovish Treasury
• Fed maintaining rates at zero through 2023; and
• The possibility of additional QE (hinted by Jay Powell earlier this month)

It’s a brave person who is shorting the market given the wave of liquidity to come…  

And whilst we might see a near-term pullback to the tune of 5-10% – my feeling is any selling will be bought. 

For example, I caught this note from Bloomberg – where JP Morgan see a possible $300B in portfolio rebalancing – in turn putting some short-term pressure on equities. 

Large multi-asset investors may need to rotate money into bonds from stocks after strong equity performance so far this month, strategists led by Nikolaos Panigirtzoglou wrote in a note Friday.

They include balanced mutual funds, like 60/40 portfolios, U.S. defined-benefit pension plans and some big investors like Norges Bank, which manages Norway’s sovereign wealth fund, and the Japanese government pension plan GPIF, the strategists said.

“We see some vulnerability in equity markets in the near term from balanced mutual funds, a $7 trillion universe, having to sell around $160 billion of equities globally to revert to their target 60:40 allocation either by the end of November or by the end of December at the latest,” the strategists wrote.

Now if we were to see some kind of “60/40” stock-to-bond ratio re-balancing – expect this to also drive down bond yields and rates (i.e., another net positive for the market). 

Put together – it feels like the stars are beginning to align for the market in 2021. 

Regards,
Adrian Tout