COVID-19 May Be Spiking, but Economic Fundamentals Still Strong

As COVID-19 cases spike globally, in the United States the combination of aggressive stimulus, new vaccines and positive economic data leave more room for equity market optimism in 2021.

From an investment perspective, the road to U.S. economic recovery started with the massive fiscal and monetary policy responses back in March, which injected an unprecedented amount of liquidity into the economy.

According to Cornerstone Market Research, the stimulus amounted to 44% of U.S. GDP in total, compared with the 2008 crisis, in which stimulus came to 5%. Both globally and in the United States, more stimulus is coming — it's just a matter of timing.

Positive Vaccine News

Though weekly jobless claims still are running high, positive COVID-19 vaccine news and solid economic indicators continue to roll in.

More than 70% of people in developed markets will be vaccinated against the coronavirus by fall 2021, according to a note from Goldman Sachs last week.

Approvals look imminent, as the FDA has meetings scheduled in the coming weeks to discuss emergency use authorizations for the Pfizer and Moderna vaccines. It's also encouraging to see AstraZeneca and Johnson & Johnson with late-stage vaccines.

If expectations are correct, it means we as a nation can get back to some sort of normalcy — going out to eat, spending time at the mall and booking vacations — which will contribute to GDP growth. Note that consumer-driven activity is responsible for almost 70% of U.S. GDP.

Recent economic data show the spike in U.S. virus cases hasn't stalled the recovery. U.S. purchasing managers' data released on Dec. 1 showed steep improvement in operating conditions. The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers' Index (PMI) posted 56.7 in November, up from 53.4 in October.

The improvement was the sharpest since September 2014, as the headline PMI rose for the seventh successive month. PMI has a strong correlation to corporate profits; when it rises, we can expect corporate profits to increase, which will boost stock prices.

Last week, the Chicago Fed's national activity index, which gauges overall U.S. economic activity, rose to 0.83 in October from a revised 0.32 in the prior month. October's increase was the first gain in four months, suggesting a good start to the fourth quarter.

At the same time, home prices are rising broadly across the United States, a sign of consumer confidence. The latest S&P CoreLogic Case-Shiller 20-city home price index showed that home prices rose 6.6% in September from a year earlier — much higher than its 5.3% increase in August — for the biggest increase since April 2018.

In another sign that the market is pricing in a recovery, copper prices are trading at seven-year highs, boosted by expectations for more global stimulus, continued industrial demand and rising inflation. China-led demand has already impacted prices; Chinese imports of refined copper and products have increased a remarkable 41% this year.

While the economic news is not perfect, taken together with the new vaccines, we can expect to see better GDP growth in 2021.

Milestones, and Questions Answered

In late November, the Dow Jones Industrial average hit 30,000, its highest level ever. This is quite a remarkable milestone when you consider what we have encountered with the pandemic.

In addition to better growth and prospects for stronger profits, the U.S. presidential transition has begun, and we are gaining insight into President-elect Joe Biden's Cabinet picks.

The most important name has been Janet Yellen for Treasury secretary. The former Federal Reserve chair under President Obama, Yellen is a well-respected intellect with a calm personality and a dovish viewpoint on fiscal and monetary policy.

In October, Yellen publicly stated that additional fiscal stimulus is needed to keep the recovery on track. A combination of Yellen and current Fed Chair Jerome Powell bode well for additional accommodation in this "whatever it takes" moment.

Follow the Profits

As we look to Q4 2020 and Q1 2021 earnings, consider the potential impact of current pent-up consumer demand. Household savings typically account for 5-6% of household income, but currently, savings are at about 14%. That extra savings adds up to a trillion dollars of potential demand.

Since March, consumers have spent $350 billion less on travel, leisure and retail, according to Empirical Research Partners. When discretionary spending returns to normal, corporate profits stand to benefit.

I still maintain that heading into the economic recovery, a prudent approach to portfolios is a barbell approach. On the one hand, you want to take advantage of economically sensitive stocks, in sectors such as materials, energy, industrials and consumer discretionary, and on the other, you want to benefit from secular technology stocks poised for growth.

The concept behind cyclicals is that the economy is trending upward, given the positive economic fundamentals, imminent vaccine distribution and stimulus. Cyclical companies offer exposure to the recovering economy. They also have operating leverage, having already been through years of cost reductions and restructuring in a low interest-rate environment.

Technology, the other side of the barbell, is important because of the strong potential for secular growth and market upside. Areas to consider with significant market opportunities are the internet of things (IoT), SaaS cloud, retail e-commerce, wearable tech and contactless payments.

While nothing is a sure bet, one thing we can count on: 2021 will be better for consumers, companies and the markets than 2020. The markets are forward looking, and based on recent activity, it's apparent that the market sees better growth, profits and more clarity ahead.

Stephanie Link, Hightower Chief Investment Strategist

Stephanie link is chief investment strategist and portfolio manager at the national wealth management firm Hightower. She leads the firm's Investment Solutions Group, which specializes in outsourced chief investment officer services, model portfolios, separately managed accounts, investment research and due diligence for Hightower advisors. Follow Stephanie on LinkedIn and Twitter @Stephanie_Link.