Despite economic figures looking dire the past week, stock markets bounced back to record highs on the vaccine rollout news and promises of fiscal aid out of Washington. Investors continue to look past the stream of bad data to focus on what the future holds, hoping the near-term shutdowns and layoffs do not portend a bigger trend that would leave lasting scars on the labor market and the US consumer-led economy into 2021 and beyond. There was no shortage of negative prints, with retail sales falling more than expected in November, applications for unemployment rising to the highest levels in three months, and mobility data showing significant declines in Americans venturing outside their homes to spend. Adding to possible angst are market measures flashing sell signals, such as fund managers holding extremely low levels of cash, sentiment and valuations near record highs, and investors increasingly crowding into the same trades. This recipe could make for a flare up of volatility ahead.
Soothing investors this week, the Federal Reserve held it’s final meeting of the year and announced no quantitative change in monetary policy in terms of interest rates or bond buying. Fed Chair Jerome Powell also sounded the most optimistic he has since March and suggested that support will remain in place for long into the future. While the jobless data looks to remain choppy for the next several months, the central bank upgraded their forecast for economic growth next year to 4.2%, but they intend to keep rates near zero until at least 2023. As they have reiterated all year, the need for fiscal aid from Washington remains crucial to the recovery for bridging the gap for the unemployed and struggling businesses. Importantly, consumers in aggregate are still showing resilient balance sheets unlike prior crises, with the personal savings rate the highest since the 1970s at 13%, and lower outstanding debt service in households.
Given the significant cross currents we’re witnessing with increased government support, easy monetary policy, and declining economic indicators, we have trimmed our overweight to risk assets marginally, but remain positive on the outlook for the medium term. Plenty of risks remain in the near-term, particularly as equities continue to look slightly overvalued and sentiment exuberant. The next leg of the rally higher is more likely to come on the back of the reopening of the economy closer to the middle of the next year, meaning we have a long way to go before the sense of nervousness around the virus can be alleviated. We continue to believe that active management will benefit in this environment, as individual security selection is crucial to finding the best opportunities in today’s market. The largely liquidity-driven bull market since the Global Financial Crisis looks to be moving to a more fundamentals-based one, where companies that can thrive and innovate in a post-pandemic world will experience outsized gains ahead. 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.