Seeing a glass half full
Plenty of reasons to be optimistic.
Bottom line It’s been a brutal year, to be sure. Tragically, the global pandemic has already claimed more than a quarter-million American lives, and the current surge in infections is breaking records and swamping hospital capacity. Nearly 12% of hospital beds are now occupied with Covid-19 patients, the most since April. In addition, the most contentious U.S. election in our lifetime is still dragging on, marred by recounts and litigation, and we’re unlikely to have the complete picture until the two Senate runoff elections in Georgia on Jan. 5.
Reflecting this ongoing health-care crisis, the Center for Disease Control and Prevention (CDC) yesterday urged Americans not to travel for Thanksgiving and to celebrate the holiday only with members of their immediate household. Mask-wearing, frequent hand-washing and outdoor dining (or plenty of open windows indoors) should be the rule, it said. Gatherings should be limited to 10 people or less, pre-testing is recommended, and hugs, kisses and handshakes are discouraged. Those with immunological problems should avoid attending altogether, lest they get infected by a returning asymptomatic college student.
Last year, 55.3 million people—a 2.9% year-over-year (y/y) increase—traveled at least 50 miles from their homes over the extended Thanksgiving weekend by car, plane, train, bus or cruise ship. That marks the second-highest number (behind 2005) of Thanksgiving travelers since AAA Travel began recording data in 2000. That figure likely will be at least 10% lower this year, which would make it the largest y/y decline since 2008, when we are mired in the depths of the Great Recession. The CDC noted that there have been spikes in infections this year after the Memorial Day, Independence Day and Labor Day holiday weekends. Air travel remains down 60-70% from a year ago, and the Thanksgiving period is traditionally the busiest time of the year. But this year’s volumes are unlikely to noticeably improve, due to the abundance of caution that most people will take.
Desert island Despite these problems, the S&P 500 has risen 12.4% on a total-return basis since the end of last year. That favorable return clearly masks the equity market’s 35% intraday plunge from Feb. 19 to March 23 (the sharpest decline from a record high to a bear market in history), and its subsequent 69% intraday rebound to Nov. 9 (the strongest rally from a bear market bottom to a new record high in history). If an investor had been mercifully stranded on a desert island this year and was just rescued today, he or she would have missed all of this record-breaking volatility and thought we were enjoying a pretty good year.
We have a lot for which to be thankful In that spirit, there are several areas that have improved markedly over the course of the year, which provides us with some confidence as we look into 2021:
Vaccine progress a game changer Pfizer (in its joint venture with BioNTech) and Moderna announced over the past fortnight that their respective coronavirus vaccines enjoyed 95% efficacy in Phase 3 human clinical trials. We were expecting 50-60% efficacy, so this level is extraordinarily positive. Pfizer applied for expedited FDA approval today for emergency use, and we believe the agency will approve both drugs shortly.
Pfizer has already produced 50 million doses of their vaccine and Moderna 20 million (both in anticipation of FDA approval), so we could vaccinate 35 million Americans over the next month or so. These vaccines require two doses to be administered to patients 21 days apart, so the government will prioritize the early doses of the vaccine to frontline health-care professionals, then to first responders, and finally to the elderly and to people with immunological issues. In addition, Pfizer expects it can produce an additional 1.3 billion doses over the course of 2021.
In conjunction with three other drug companies currently in advanced human clinicals (an Oxford University/Astra Zeneca joint venture, Novavax and Johnson & Johnson), we could begin to achieve critical mass and herd immunity in the U.S. by mid-year 2021. This will collectively help to normalize economic activity, which should ultimately increase economic and corporate profit growth.
Employment improving Initial weekly jobless claims of 742,000 for the week that ended Nov. 14 have fallen 89% from their peak in late March, and they’ve declined by half from 1.435 million in late July, when the weekly $600 unemployment bonus expired. Importantly, continuing claims of 6.37 million for the week that ended Nov. 7 have fallen 74% from their peak in mid-May, and they’ve also declined 60% from 16.1 million since the unemployment bonus expired. In addition, the unemployment rate (U-3), which peaked in April at 14.7%, plunged to 6.9% in October. Finally, the household survey, hours worked and wages have all risen sharply since the labor market’s April trough.
Powerful GDP bounce Third-quarter GDP soared a stronger-than-expected 33.1% quarter-over-quarter (q/q) annualized (7.4% q/q non-annualized), marking the single largest quarterly economic expansion since record-keeping began for this metric in 1947. This largely erased the second-quarter’s plunge of 31.4% q/q annualized (-9% q/q non-annualized), which was the single largest economic contraction in history. The U.S. economy entered the deepest recession on record in February, and we believe the recession ended in May or June (we’re waiting for the NBER to officially date its conclusion).
Third-quarter earnings strong We’re 95% of the way through the third-quarter reporting season and S&P results were much stronger than expected. Revenues have declined only 2.2% y/y, with 75% of companies beating consensus estimates by an average of 2.5%. Earnings were expected to decline 21% y/y, but they’ve only fallen 6.8% thus far, as 83% of the companies are beating consensus estimates by an average of 19%, which is the second-highest beat rate on record, trailing only this year’s record 22.5% in the second quarter.
Divided government The election was much closer than expected across the board, as voters seemingly split their ballots at a much higher pace than usual. Voters apparently selected former Vice President Biden at the top of the ticket to reduce the noise and the tweet volume in the White House but also voted for their Republican senators and representatives further down the ballot to engineer a legislative check-and-balance in Washington.
So instead of increasing its majority in the House of Representatives to an estimated 45-55 seats, Democrats saw their comfortable 35-seat lead shrink to perhaps 11. And while the two Georgia runoffs will determine the Senate majority, Republicans appear poised to add to their existing narrow 50-48 lead with at least one win. Divided government will keep the incoming Biden Administration’s new legislative initiatives in the middle of the fairway. For investors, this is the best of all possible worlds, as we keep President Trump’s lower tax rates and regulations but potentially benefit from Biden’s Phase 4 fiscal stimulus and infrastructure plans.
In a recent speech, Biden said now is “a time to heal” from the partisan rancor and divisions laid bare during this election. In the spirit of the Thanksgiving season, for the benefit of all Americans, let’s hope he’s right.
Happy Thanksgiving, everyone!