– With elections in mostly the rear view, coronavirus will occupy center stage
– Vaccine results have been very promising and herd immunity looks possible by mid-2021
– Stocks had a very strong November with the S&P 500 up about 11%
Election now in the rear view with no huge surprises
After a very long vote counting process, Joe Biden was declared the winner of the 2020 presidential election. As we had noted for some time, this was widely expected and therefore, we did not expect much of a market reaction to a Biden victory. However, the start of the month was very strong for equities, which coincided with the election, but we think it would be a step too far to say it was because of the election. Control of the Senate was expected to and proved to be much more of a toss-up. In fact, it ended up being so close that we will not know which party controls the Senate until after a January 5th run-off election in Georgia where two seats are up for grabs. Democrats need to win both seats to take control and based on history that seems like a very tall order.
The biggest surprise from the election was an unexpectedly strong performance from Republican house candidates. The 2022 mid-terms were already shaping up to be an uphill battle for Democrats to retain the house and after the strong Republican showing in this year’s election, it seems very likely the house flips in the mid-terms. Barring a major surprise in Georgia, that leaves the country with a divided government and will serve to severely hinder an ambitious progressive agenda. For the markets, the most damaging Biden proposal was always the increase in corporate tax rates and that appears to be off the table. Additionally, the cabinet picks of Biden, to this point, have been relatively moderate and non-controversial. The market seemed especially happy with the possibility of Janet Yellen, the former Chair of the Federal Reserve, as Treasury Secretary.
Coronavirus continues to weigh on employment; other economic data remains strong
Coronavirus news has been very much a tale of two cities. For the long term, the news has been fantastic with multiple vaccines producing very strong results. The vaccines paired with Operation Warp Speed’s incredible distribution plan means that there is a very strong possibility that the country can return to normal by the end of next year. The markets responded very favorably to the various vaccine results and now has greater ability to look through near-term coronavirus and economic issues. We think this will be a nice tailwind for equities and allow for some degree of resiliency should more drastic near-term measures become necessary. As far as the near term, it is bleak. The surge in the Midwest appears to have peaked, however, a post-Thanksgiving wave can not be ruled out yet, but the limited progress in the Midwest has mostly been over showed by a strong uptick in cases and hospitalizations in the Northeast, most notably Pennsylvania. Throughout the country the case load is very high, which raises the prospect that a Thanksgiving surge could force further shutdowns. Many states have pulled back on the reopening and/or have imposed mask orders.
With the slowing of reopening, employment data has shown a much slower pace of improvement. Initial jobless claims, one of the best forward look indicators for employment has remained stubbornly close to 800k per week, worse than the highest weekly reading of the ‘08 crisis. Non-farm payrolls showed that 245,000 jobs were added to the economy in November, but that the unemployment rate improved to just 6.7% from October’s rate of 6.9%. The stalling in employment data appears to have created some sense of urgency in Congress and another stimulus bill looks likely by the end of the year, but with the total amount falling well short of previously discussed amounts. Stimulus checks are not likely to be included as part of the currently proposed $900 billion dollar plan.
Other economic data has looked good. Despite the employment woes, consumers are well positioned for strong holiday spending. The housing market has also made a substantial recovery. New plus existing homes sales reported 7.1 million units sold in October. This is above the pre-covid level that was 6.5 million units sold in February. Businesses are increasing capital expenditures (capex) Q4 core capital goods orders are on pace to increase about 15%. Total capex is increasing much faster than it was even pre-covid. This increase should pay strong dividends for 2021 and 2022 GDP numbers. US manufacturing has led the capex charge, due in part to a very strong recovery in China.
Where do we go from here?
Not to jinx it but, 2020 looks to be on pace to end up being a surprisingly good year for markets. Seasonally, there tends to be a Santa Claus rally in December, but given the strong returns in November, there is a chance that it just came early this year. Coronavirus is the biggest risk moving forward but we remain optimistic that the market will weather anything short of draconian shutdowns, like those we saw in April of this year. Markets seem reasonable well positioned to continue their upward march, for now.
What should I do?
With the end of the year approaching, it is a good time to consider what your 2020 tax picture is looking like. We are always here to help to help you understand the taxes generated from your investments. We especially like helping our clients in structuring their charitable endeavors in to maximize the tax benefit to them and the impact to the charities that so many of our clients generously support. Most importantly, enjoy the holidays!
To learn more about the author of this article, Cormac Murphy, CFA, visit: https://adamswealth.stealthmedia.com/team/cormac-murphy/
Or connect with him on LinkedIn:https://www.linkedin.com/in/cormac-murphy-cfa-33897914/.
Adams Wealth Management is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.