Markets Weigh Headwinds… But Remain Mostly Optimistic on 2021

• A range-bound S&P 500 with an optimistic tone
• Will a vaccine be an “economic panacea” in 2021?
• JP Morgan sees economic contraction for Q1 – but bullish on Q2/Q3

Despite the market closing slightly lower this week – the market remains optimistic.

For example, a number of economic headwinds hit the tape this week:

• COVID-19 infections hitting new daily highs — coupled with a record ~12M tests conducted for the week ahead of the holiday season;
• Deteriorating weekly  unemployment data;
• Treasury choosing to end key Fed emergency funding programs; and
• News of further various State lock downs to help contain the spread.

Nov 20 2020 – Initial Weekly Claims Remain Stubbornly High

However, despite what would otherwise be negative news for the recovery – markets remain resilient – focusing on the potential upside for next year. 

S&P 500 – Resilient

The S&P 500 traded a little lower this week – down around 1.5%

S&P 500 – Nov 21 2020 

The market continues to find resistance at the previous major high (point “A”) – also the top of our distribution (“A-B”)

The last few weeks I suggested this is where the market find find selling pressure – and potentially move back inside the range we’ve seen since July. 

That said, the market remains bullish – with the 10-week EMA trading above the 35-week EMA.  

What’s more – the enthusiasm for small-cap stocks continues to exceed that of the broader S&P 500, Nasdaq and Dow Jones.

For example, below is the relative performance of each for the month of November (i.e., since development of the positive vaccine news) 

Russell 2000 Exceeds Returns of All Indices for Nov 2020

As I said during the week – what’s most notable here is the shift away from “big tech”.

Put another way – armed with news of a vaccine – it’s no longer the “security blanket” investors seek. 

Despite the strong headwinds of over 12M still unemployed, COVID infections rising sharply, the lack of any fiscal stimulus until Q1 2021 – the market is willing to look past this and focus on the potential economic recovery next year (with exposure to risk)

My take on the price action is whilst we could see a near-term pullback – the market is likely to end the year with double-digit full year gains. 

JP Morgan Warns of Negative Growth

Last month I warned readers of a possible double-dip recession. 

My concern was most around the lack of fiscal stimulus from the government for the balance of 2020 (with unemployment checks for $600 expiring July 31)

The first round of stimulus was key to the economy showing a “rebound” the past few months… as consumers continued to spend on home essentials. 

I use the term “rebound” liberally given:

(a) $2+ Trillion in fiscal relief; and
(b) $7.2 Trillion added to the Fed’s balance sheet. 

Fed’s Balance Sheet Continues to Expand – Nov 2020

Put another way, if remove these measures and there would be no “rebound”. 

From there, I also felt that if fiscal relief was not coming post August 1st – then expect growth to possibly turn negative – as millions of struggling families reduce spend. 

Now if we couple the lack of stimulus in the second half of the year – a sharp increase in COVID infections – and the austere measures by government agencies to effectively shut-down the economy – this will almost certainly result in economic contraction. 

JP Morgan is now the first major bank to issue a bearish forecast for the economy for the first quarter (citing the same reasons above). 

The new forecast is a departure from Wall Street’s widely held view that the first quarter would be positive, with an improving economy throughout 2021.

The JPMorgan economists said they expect the economy to expand briskly in the second and third quarter, based on positive vaccine developments.

On this I remain hopeful but don’t see the vaccines as some kind of panacea (for reasons I’ve outlined previously) 

JP Morgan see the first quarter contracting by 1% after growth of 2.8% this quarter.

For Q2 2021 – they see the economy rallying and growth of 4.5% followed by a robust 6.5% in the third quarter.

From mine, this forecast is heavily dependent on two things: 

(a) $2 Trillion of fiscal stimulus being signed early in Q1 by Congress
(b) widespread distribution and  trust in available COVID-19 vaccines

I want to emphasize the point of consumer trust (something not often discussed in the media). As I don’t think a vaccine automatically implies vaccination. 

But I could be wrong… and maybe people will line-up to get it?

Who knows. 

Irrespective… I think what we see with both immunization levels and the spread of the virus – will be major themes through all of 2021 (and potentially into 2022).

Echoing my sentiment of recent weeks – market’s feel largely range bound as they balance both the head and tailwinds.

But on the whole – they maintain a mostly optimistic tone. 

The news this week would normally sink markets to the tune of 3-5% – but it’s not what we saw.

In fact, the Russell 2000 managed to show positive returns. 

What’s that tell you?

For me, markets are looking beyond the next 6-9 months – instead choosing to see vaccines as some form of economic panacea in the second half of 2021. 

And that may be true…

And if we do see the economic momentum mainstream believes is ahead as a result a so-called “silver bullet”...  the conversation will quickly shift from a relentless focus on infection rates and immunization… to what we see with interest rates and inflation. 

To be clear, rising inflation and higher rates are not a threat today. 

But should see the velocity of money start to improve in 2021..  then this will become a focus.