It won’t be the Thanksgiving that many of us had envisioned. COVID cases are currently rising at catastrophic rates, and hospitalizations and fatality rates are following in tow. Family plans have been meaningfully altered — I, for one, won’t be attending the Macy’s Thanksgiving Day Parade for the first time in decades. And while dinner outdoors with my sister’s family in 40-degree weather will be novel, it will certainly not be ideal. We recognize, of course, that these are small prices to pay to promote the health and safety of our families. Instead of longing for Thanksgivings past, we’ll focus on the true spirit of the holiday, and remind ourselves of what we’re thankful for.
I think this is a healthy exercise for investors as well. Below, I list 10 items that investors can be thankful for this year.
1. Vaccine results are promising
Pfizer has reported its vaccine to be safe and 95% effective and will apply for emergency approval within days. Moderna says its vaccine is 94% effective. Oxford-Astra Zeneca’s vaccine is reported to show robust response among older adults. Approvals from the Food and Drug Administration are still pending, and distribution challenges will still need to be overcome. Nonetheless, the medical and scientific communities appear to be on the precipice of meaningful breakthroughs.
2. Financial conditions have eased meaningfully
The US Federal Reserve (Fed), at a time of severe market distress in the spring, emerged as a liquidity provider and a lender of last resort. Financial conditions have since eased meaningfully, an affirmation of the Fed’s response.1 The US dollar has weakened,2 erasing deflation concerns,3 the yield curve has steepened,4 and corporate borrowing costs have sharply declined.5 The Fed has signaled its intent to keep financial conditions easy for at least the next two to three years,6 providing a potential tailwind to financial markets.
3. The worst fears regarding the US election have not transpired
There was substantial investor concern prior to the election, including fears that a contested election would cause severe volatility, anxiety that a “blue wave” would lead to higher taxes, and everything in between. The S&P 500 Index, notwithstanding all the hand-wringing and consternation, returned 7.24% in the two weeks from election day.7
4. The US job market is gradually healing
This section may seem out of touch with the unemployment rate at 6.9%,8 and 742,000 Americans filing for first-time unemployment claims in the week of Nov. 14.9 But it’s important to note that continuing unemployment claims have fallen from 25 million in April to 6.4 million in November,10 a still-calamitous outcome but a marked improvement. Coincidentally, and for what it’s worth, there are currently 6.4 million open jobs in the US.11
5. The US housing market is booming
Low mortgage rates,12 sound demographics (who said those 30-somethings would never form households?), and the lure of the suburbs appear to be supporting the US housing market. Single-family homebuilding and permits for future homebuilding each climbed to the highest levels since early 2007.13 The National Association of Home Builders Index currently stands at its highest level on record.14
6. The shipping side of the US economy is strengthening
The Cass Corp Freight Shipments Index (which measures US shipments from companies representing a broad sample of industries including consumer packaged goods, food, automotive, medical/pharma, retail and heavy equipment) has been staging a sound recovery.15
Cass Corp Freight Shipments Index
7. Asian economies have been coming back
Asian countries, which appeared to have done a better job of compressing COVID cases than did the west, have experience a sharp rebound in economic activity. The China Li Keqiang Index, which measures the change in bank lending, rail freight, and electricity consumption, has risen by 7.6% over last year’s levels.16 Japan, having benefited from the resurgence in Chinese economic activity, has experienced a surge in exports.17
Japan Real Exports
8. US corporate earnings have largely recovered
S&P 500 Index corporate earnings in the third quarter appear to have recovered approximately 80% of their decline, climbing to $155 in the third quarter, up from $112 in the second quarter.18
9. A confluence of factors continues to favor equities
I expect the global economy to continue to recover in 2021 and beyond, the near-term risks notwithstanding. Betting against that recovery is akin to betting against medicine, science, and human ingenuity. Stocks are trading cheap to bonds.19 There is a substantial amount of money in risk-free assets earning minimal returns.20 The Fed has signaled its intention to keep rates low for the foreseeable future,21 thereby potentially incentivizing that money to move into riskier assets. Market cycles tend to end with excessive investor optimism and a prolonged Fed monetary tightening cycle. Seen from that lens, one may conclude that we are in the early stages of the next elongated market cycle.
10. Every generation has been asked to overcome substantial challenges
The days ahead will be challenging. The content above is not intended to sugarcoat what the country is facing. Nonetheless I look ahead with optimism knowing that every American generation has faced its share of challenges and has come back stronger. Over time, markets will reflect whether conditions are getting better or worse. History teaches us that conditions tend to improve over time, even if the path isn’t always straight. It’s why the S&P 500 Index has hit a new high every 16 days since 1957 and is only a stone’s throw away from a new high today.22
Happy Thanksgiving. Be safe and be well.
1 Source: Goldman Sachs, 11/19/20. As represented by the Goldman Sachs US Financial Conditions Index, which is a weighted average of riskless interest rates, the exchange rate, equity valuations, and credit spreads, with weights that correspond to the direct impact of each variable on gross domestic product.
2 Source: Bloomberg, 11/19/20. As represented by the US Dollar Index (DXY).
3 Source: Bloomberg, 11/19/20. As represented by the 5-year US Treasury Inflation Breakeven. The breakeven inflation rate is the difference in interest rates between Treasuries and Treasury Inflation-Protected Securities, and it reflects the level of inflation market participants expect over a certain time period.
4 Source: Bloomberg, 11/19/20. As represented by the difference between the 10-year US Treasury rate and the 3-month US Treasury rate.
5 Source: Bloomberg, 11/18/20. As represented by the Bloomberg Barclays US Corporate High Yield Bond Index, which measures the US dollar-denominated, high yield, fixed-rate corporate bond market.
6 Source: Fed Open Market Committee Minutes, 9/20
7 Source: Bloomberg, Standard & Poor’s. Return is from Nov. 3, 2020 to Nov. 17, 2020.
8 Source: US Department of Labor, 10/31/20
9 Source: US Department of Labor, 11/14/20
10 Source: US Department of Labor, 11/14/20
11 Source: Bureau of Labor Statistics: Job Opening and Labor Turnover Survey, 9/30/20
12 Source: Bankrate.com, 11/19/20
13 Source: US Census Bureau, 10/31/20
14 Source: National Association of Homebuilders (NAHB), 11/20. The NAHB/Wells Fargo Housing Market Index is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market.
15 Source: Cass Information Systems, 10/31/20
16 Source: Bloomberg Economics, 10/31/20
17 Source: Bank of Japan, 10/31/20
18 Source: Evercore ISI, 9/30/20
19 Source: Bloomberg, 11/19/20. Analysis compares the S&P 500 earnings yield to the 10-year US Treasury rate.
20 Source: Investment Company Institute, 11/19/20. As represented by Money Market Assets.
21 Source: Fed Open Market Committee Minutes, 9/20
22 Source: Bloomberg, Standard & Poor’s, 11/19/20
Blog header image: Sean Locke / Stocksy
All investing involves risk, including the risk of loss.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates to project future interest rate changes and economic activity.
The opinions referenced above are those of the author as of Nov. 20, 2020. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.