Risk assets jumped this week, with the surprise announcement of a potential vaccine with over 90% efficacy and approval of a treatment option to reduce hospitalization rates dramatically encouraged investors to place their bets on a rebounding economy. This significant milestone represents a great day for science and humanity, and could lead to a much quicker turnaround in the global economy than originally predicted. Meanwhile, the election appears to be behind us, with Joe Biden’s lead likely too great to be reversed with any legal challenges or recounts. On the economic front, initial jobless claims continue to fall, but remain extremely elevated at over 700,000 for the past week. The ongoing jobs churn is remarkable, with data showing continuing claims declining and unemployment rates moving in the right direction, all while more request additional benefits. Despite the unprecedented monetary support from the Federal Reserve, inflation remained unchanged for this month, allowing the Fed to stay aggressive in combating the recession with low rates and asset purchases.
Initial equity market gains this week were clear in their intentions; those companies who would benefit most from the reopening of the economy saw their share prices climb at the expense of the stay-at-home stocks that have led this year’s recovery. The “Great Rotation” appeared to be alive and well with the promise that global consumers could return to their every day lives and open their wallets once again, benefiting retailers, hospitality and leisure, commercial real estate, and other specific industries. The big question remains how durable this shift is, and whether the dominant tech names that have continued to climb will selloff or simply underperform other, more cyclical areas of the market. Meanwhile, market volatility is approaching key levels where a flood of additional buyers could increase their equity exposure meaningfully if the levels holds. Those investors who focus on maintaining specific volatility targets have been underweight their long-term equity allocations due to the ongoing uncertainty, but that could soon reverse on the recent developments and add a significant new source of support for risk assets. Also encouraging is the steady rise in interest rates seen in the past month, now at the highest levels since March, signaling anticipated higher growth ahead.
As mentioned in prior communications, we have been reducing our overweight to growth and technology stocks and moving more into less-expensive, economically sensitive sectors that should benefit from an acceleration in growth in the coming years. We believe that the combination of a completed election and development of a powerful vaccine eliminates two out of the three major hurdles we were concerned with, leaving only fiscal support out of Washington as the remaining obstacle to overcome. If D.C. legislators can come to some form of agreement on bridging the fiscal gap between now and when the vaccine can be widely distributed, markets would have a green light to move higher with economic growth, political stability, stimulus, and monetary policy all acting as tailwinds for risk assets. If recent history is any barometer, however, politicians have a poor track record of major accomplishments and we must view this outcome with skepticism. 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.