My outlook right now reminds me of a classic spaghetti western from the late 1960s.
The spike in Covid that started right after Thanksgiving and continued through the holidays has started to abate. Cases reported Sunday January 31st were the lowest since 11/9, the 7-day average cases were the lowest since 11/14, and hospitalizations were the lowest since 11/29. Hospitalizations are down 14.3% week-over-week, the fastest decline since 6/4. Source: Bespoke Investment Group.
And while the distribution of the 2 existing Covid vaccines has been less than adequate so far, a 3rd vaccine is likely to be approved in the next couple of weeks. The sooner the majority of us get vaccinated the sooner the economy can truly get back on track. The “Good” is that the trend is finally going in the right direction again.
The slower-than-expected Covid vaccine rollout coupled with a continued rise in cases and restrictions on activity across the country, held back growth in the fourth quarter. However, activity is projected to rebound strongly later in the year, once vaccines are more widely distributed and the economy can get back to some semblance of normal. “There’s nothing more important to the economy now than people getting vaccinated,” Federal Reserve Chairman Jerome Powell said on January 27th.
2020 GDP fell by 3.5%, the worst year since the end of WW II. Despite a sizeable number of people getting back to work, we still have some 4.8 million people of unemployment and another ~5 million small business owners receiving government assistance. The “Bad” is that the holiday gathering surge in Covid has really stalled the economic recovery, which will likely impact the early part of 2021.
There remains a wide gulf between the Covid relief package proposed by the Biden administration and a proposal from 10 moderate Republican Senators. If both sides aren’t willing to compromise, the partisan divide in Washington likely continues. This would mean potential delays in getting additional funding for vaccine rollout and money to support those unemployed and small business owners. Benefits from the last Covid relief package expire in mid-March. The political environment remains the “ugliest” thing we have to face.
So what does it all mean for you?
I expect volatility to be higher than we have seen over the last several months. I am concerned that any delay in vaccine rollout and/or more government stimulus has the potential to lead to a double-dip recession in the economy. I am also concerned that the financial markets are over-extended on the anticipation of a positive outcome to these 2 items, and as such are susceptible to a pullback over the next few months. However, I expect any pullback to be moderate in scope and likely to be a good thing for the markets long-term.
Here’s an updated chart that compares this new bull market versus the ’82 and ’09 bulls. Now, if history repeats, the next several months could be due for a break or consolidation.
We have tightened up our risk tolerances a bit and remain balanced in our approach – looking out for problems to avoid but also opportunities to take advantage of.
I hope this information is helpful. Please feel free to share it with family and friends.
P.S. Thank you for your referrals. They are making a big difference in my practice. Feel free to share my name with your friends on Facebook or LinkedIn.
I want to extend a special thanks to clients & colleagues who have recently referred us to family and friends: Greg & Valerie W, Vic & Carol C.
February Calendar of Events (comments and additions for future months are always welcome)
- February is Black History Month. Let’s all strive for understanding and acceptance for people of all colors, nationality, and religions.
February 2nd Groundhog Day – yay he didn’t see his shadow. No let’s hope he’s reliable!
February 7th Super Bowl Sunday – please watch safely (masks and social distancing)
February 14th Valentine’s Day
February 15th Presidents Day
February 16th Mardi Gras
Sources: Bespoke Investment Group, LPL Research, CNBC.com
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