’46’ in ’21

Jack Ablin Market Commentary

Now that President-elect Biden has presumptively captured the White House, Americans in general and investors in particular are anticipating what 2021 might bring. Former Vice President Biden will be 78 years old when he’s sworn in next year and the consummate Washington insider will need to hit the ground running. Addressing the impact that the global pandemic has waged on America’s heath and its economy is job one. After a late summer respite, COVID-19 infection rates are climbing. The United States has logged 9.8 million cases and more than 237,000 related deaths. Our caseload is rising at a rate of over 120,000 per day, the highest infection rate since the outbreak began. Meanwhile, pandemic precautions have left our nation with 10 million fewer jobs than it had at the beginning of the year. As a result, millions of renters have been unable to scrape together their monthly rent. While federal and local eviction moratoriums have enabled them to keep roofs over their heads, those provisions are set to expire by January, according to The Wall Street Journal. The Federal Reserve Bank of Philadelphia estimates that outstanding rent debt could reach $7.2 billion before the end of this year. Without some relief, millions of renters could face eviction. 

The world received promising news this week in the battle against COVID-19.  Pfizer and BioNTech announced their COVID-19 vaccine prevented more than 90 per cent of symptomatic infections in a study of thousands of volunteers. The news is significant for two reasons. First, a 90 per cent effectiveness rate, if it holds, implies the world will be able to conquer the indomitable COVID-19.  Second, an effective vaccine helps clarify a timeline for economic recovery, removing one of the biggest impediments to investing in lower-quality, cyclical companies.   

From an economic perspective, Biden’s first year will resemble 2008, his first year as Vice President, when the Obama Administration battled the financial crisis. This time around, his fiscal and monetary toolkit are depleted. On the fiscal front, a divided government, while favorable for equity market investing, could pose a challenge in a rebuilding year. Republicans were already wringing their hands over a federal budget deficit pushing $3 trillion this year, representing more than 16 per cent of GDP – and that was under a Republican administration. As a result, market participants anticipate a relief spending package under a divided government of about $1 trillion early next year, a fraction of the $2.5-3 trillion that would have likely been passed under a Democrat-controlled Senate.  

Monetary policy, an effective tool in combating the financial crisis, is appreciably enfeebled. Armed with a 5.25 per cent Federal Funds rate and a balance sheet of just under $900 billion, the Federal Reserve beat back the financial crisis by slashing interest rates and buying bonds. Within a year and a half, the Fed cut its overnight lending rate to zero and bulked up its balance sheet by a whopping $2.3 trillion.  Heading into 2021, the Fed’s overnight rate is zero and its burgeoning balance sheet is bursting at the seams. Low interest rates have widened the market’s price-earnings ratio in recent years. Monetary policy expansion since the financial crisis helps explain why 160 percentage points of the S&P 500’s 260 per cent gain over the last decade was attributable to valuation expansion, leaving US equities at lofty levels. 

The discovery of an effective vaccine is a blessing. It will help protect the world from the short- and long-term health effects of COVID-19. The economic damage, however, could take much longer to heal.  

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