Equity markets moved higher this week, as a potential COVID-19 vaccine pushed optimism to loftier levels. Despite advances in the fight against the virus, the economy remains mired in recession, with unemployment claims continuing to roll in, adding another 2.4 million applicants this week alone, further damaging hopes for a consumer-spending-led resurgence. The Federal Reserve confirmed the bad data, recognizing that the current economic crisis is severe, and suggesting that much more needed to be done to avoid a prolonged recession. Some signs of a turnaround appeared, however, with manufacturing activity picking back up and oil demand increasing sharply from the shutdown. Meanwhile, Congress is continuing to debate what the next round of stimulus may look like, with proposals ranging dramatically, though more is likely necessary soon to stem additional losses for Americans.
A major concern that has reemerged during the crisis is the backlash against China and renewed calls for deglobalization to supposedly avoid future crises and supply chain issues. The White House and some members of Congress have continued pointing fingers and pushing for punitive measures against China, ranging from delisting Chinese companies on US stock exchanges, to additional tariffs, to forced manufacturing of certain products on US soil. These tensions could quickly spillover into a renewed conflict with China, which is eager to defend their response to the virus and their export-oriented economic growth model. At a time when growth is desperately needed globally, a new trade war would only worsen the current situation, deepening supply chain problems, and increasing prices on American consumers. Countries attempting to move more towards greater self-reliance and increasing trade barriers was partially to blame for the severity of the Great Depression in 1929, as global growth was hampered further by poor political calculus. While significant issues undoubtedly exist in the current global trade regime, now is certainly not the time to be putting any downward pressure on economic growth.
At this time, we are keeping our current neutral allocations, as reason for caution has risen along with equity markets. We believe risk assets are now priced as though a successful vaccine that can be rapidly produced is right around the corner, that no second or third waves of the virus are in store, and that geopolitical risk is essentially non-existent. However, we are already seeing outbreaks reemerge in China and other locations, a real cause for concern. Also, the fastest-ever vaccine development in the past, for mumps, took more than four years to create. Doctors around the world point to the fact that there is a lot of optimism around the possibility of a successful vaccine being found soon and that optimism may be overzealous, given how little we know about the virus. Mutation of the virus could create even more headaches ahead, in addition to the fact that producing enough vaccines for 7.6 billion people in the world would be nearly impossible in 18 months. We will continue to evaluate these risks and the evolution of the virus and the economy’s reopening. For now, we believe a conservative stance is warranted given the significant number of unknowns. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.