Westwood: First Look 2021 – Changes Are Coming; Consumers Increasingly Optimistic

While domestic equity markets are once again near all-time highs, along with a hot housing market reminiscent of 2005, America stands at the edge of a great precipice.

The global pandemic has rocked global commerce, sentiment and social stability. At minimum, it has triggered cultural, economic and technological reverberations sure to last for years to come — with psychological impacts likely bigger than the Great Recession.

As winter sets in the Northern Hemisphere, a resurgence of cases have once again sparked fears for health, safety and fiscal stability as COVID-19 adds to the seasonal strain of a typical cold and flu season in a very atypical way. As this is being written, several states and nations have reverted to strict curfews to control the spread as record amounts of Americans are being diagnosed with COVID-19.

But isolation, social distancing and mask wearing are getting much needed relief as two coronavirus vaccines, with greater than 90% efficacy, have now been approved for use in the states. Both Pfizer-BioNTech and Moderna have gained the FDA’s emergency blessing and began distribution of millions of doses to frontline personnel and the most critically in need (with more groups soon to follow). Despite the rapid deployment, and promise of hundreds of millions of inoculations by spring, many experts still do not see a return to normalcy until fall 2021, at minimum. Around the world, dozens of other vaccines are currently being developed and even distributed, adding to what seems to be a sense of growing optimism that we are finally nearing the end of what’s been a debilitating scourge. But with a still limited number of doses available, there are many more humans in need than supply. We believe that these supply issues will be alleviated over the next few months as other global vaccine producers gain approval and begin distribution.

Domestically, a new administration will take control on Jan. 20, with fresh policies, ideas and messaging. The full effects of the transition aren’t likely to be realized for several quarters but have regained fresh momentum after the recent surprise upsets in both of Georgia’s runoff elections, which have tilted control of the Senate to the democrats. Biden has telegraphed a willingness to compromise and unify, but with its narrow control of the senate, the administration will find it easier to advance much of its agenda. In the near term, this is likely to mean more aggressive stimulative action, subsidies for certain sectors like clean energy, and other high-priority items that include repealing some of the 2017 Trump tax cuts. The longer-term effects are more of an unknown, and Biden will still face a very tight congressional body unlikely to rubber stamp new legislation outside of any executive orders. Given those factors, bond markets are now pricing in higher inflation as the 10-year rose above 1.08%, its highest level since March.

The new administration, along with the Fed, Treasury and public at large, will have to get even more creative in their quest to overcome virus-related economic sluggishness in the coming year, as an unprecedented amount of money and bipartisan legislation has already been dedicated to the pandemic; there are fewer arrows left in the quiver. The White House is also likely to face greater challenges in providing stimulus, given the magnitude of what’s already been provided, but the need remains great for many Americans and the latest messaging seems to suggest another direct payment to consumers may be on the way. Unemployment remains elevated and GDP continues to be under pressure, but we believe that the quick deployment of vaccines, coupled with good old-fashioned American resilience, will help continue to support equity valuations and a snapback in economic growth, particularly during the latter part of the first half of 2021. We expect full-year 2021 GDP growth could likely surprise to the upside relative to the current consensus estimate for 3.8% annualized growth.

Some Perspective on Last Year’s Events

By the end of 2019, stocks were making record highs and investors had just begun to express concerns over COVID-19 risks. Most could not yet fathom the severity of the pandemic, nor the…READ FULL ARTICLE