The Vantagepoint Market Perspective: Hopes for a Smooth Road Back to Normal

11/18/2020

 

In the two short weeks since election night, financial markets have rallied on the belief that the road back to normal will be both smooth and relatively fast. We are heartened by the news driving those gains, but as always, we continue to be on the lookout for bumps that might slow or derail the recovery.

The Good News

In the last two weeks, there have indeed been signs of light at the end of the long COVID-19 pandemic tunnel we’ve all been enduring. Both Pfizer and Moderna have announced vaccines that, in trials, have effectiveness rates approaching 95%. In coming weeks, both firms plan to apply for emergency approval from the Food and Drug Administration in order to begin producing vaccines for millions of people.

The hope — among market participants and others — is that the vaccines will be safe, effective, quickly distributed, and widely available and utilized by Americans by the middle of 2021, resulting in the functional end of the pandemic by summer. The vaccine news, along with a market that has decided it knows the ultimate outcome of the November 3 election, has helped push the S&P 500 and the Dow Industrials to all-time highs in recent sessions.

On the presidential election front, the nation’s major media organizations seemingly removed uncertainty about the election outcome by declaring Joe Biden the winner on November 7. And while control of the Senate hinges on two yet-to-be-held run-off races in Georgia (slated for early January), the market seems to be assuming that the Senate will remain in Republican control and Congress will remain divided, which implies that no major legislative changes can be accomplished by either political party, leaving corporate tax rates intact — something the market favors.

The vaccine news is certainly a hopeful sign that the economy will emerge on the other side of the pandemic. The economic damage is real, but the markets seem to believe underlying economic conditions are poised to quickly rebound to our former pre-pandemic strength. Large businesses — at least based on the results of the third-quarter earnings season — have proven somewhat resilient to the COVID-19 rollercoaster, though their Main Street counterparts have generally not been faring as well.  

Questions Remain

For sports fans, even football teams have been doing their best to get back to normal. NFL teams are once again facing off regularly and all the major college conferences have managed to restart their playing seasons, despite some initially postponing them.

However, much as with the rest of the COVID-19 saga, who is playing whom seems to hinge on last-minute schedule shifting based on the latest virus tallies of various teams’ rosters. The marquee matchup between Clemson and Notre Dame occurred, but without Clemson’s star quarterback who had tested positive for COVID-19.

Last weekend, the Ohio State/Maryland game was canceled after eight Maryland players tested positive for the virus. On the West Coast, the California Golden Bears barely avoided missing their first two games by playing the UCLA Bruins in a hastily scheduled matchup after both teams saw the games they were expected to play canceled due to their opposing teams’ COVID-19 issues

This type of reshuffling is also playing out in multiple areas of the economy, including businesses of all sizes, as they try to steer through the pandemic’s fallout and its ever-changing shutdowns and restrictions on economic activity.

The markets, which seem to be even more forward looking than usual, are largely ignoring present conditions and instead looking down the road to focus on the projected robust recovery. While we welcome market gains, as asset managers we also need to keep an eye on actual economic and health conditions that could interrupt or derail the markets’ upward path.

For instance, questions remain about the distribution of the COVID-19 vaccines. Pfizer’s antidote needs to be stored at -94°F, which can make shipping it to various hospitals, clinics, and doctors’ offices challenging. The good news is that the company has launched a pilot program to distribute it to four states, which could serve as a model for future efforts.

Its Moderna-created counterpart can be stored at standard refrigerator and freezer temperatures and stay stable for 30 days while refrigerated or 6 months while frozen. As a result, the company says, it can be distributed using the existing vaccine delivery and storage infrastructure.

Because both vaccines have been developed in record time and this exact widescale distribution has not occurred before, any hiccups could potentially be magnified and impact both the timing of deployment and overall effectiveness in containing the virus.

On the presidential front, the absence of a concession has meant that uncertainties continue to linger. While the markets and the mainstream press have largely moved on when it comes to declaring a winner, a large segment of the country has not. And the narrative that the election was rigged or is still in question has gained traction.

For instance, a recent Politico/Morning Consult survey found that 70% of the Republicans queried had doubts about the election’s fairness, while their Democratic counterparts said their trust in the election system grew with this election. This week, officials in Michigan briefly refused to certify vote tallies in Detroit, a technical move that likely reinforced existing beliefs on both sides of the partisan divide.

As always, we salute the dedicated public servants across the country who worked tirelessly and diligently to conduct elections and produce vote tallies regardless of outcome. Unfortunately, given the increasing polarization between the two parties, having a large segment of the country believing that the election is still in question is not exactly conducive to bringing the nation together or facilitating a smooth transition to a new presidential administration.  

Meanwhile, the number of Americans testing positive for COVID-19 or being hospitalized with it has soared in recent weeks, which increases the stresses on both hospitals and front-line health-care workers in the affected regions. By one report, over 20% of American hospitals do not have enough health-care workers to handle patients, a dire situation likely to worsen as the disease spreads.

We must not ignore the impact on these front-line medical professionals, and we must all remember that they remain the most essential workers we all rely upon in combatting COVID-19. We are encouraged that a number of states have increased restrictions in recent days and urged caution when it comes to gatherings during the upcoming holiday season. In support of our health-care workers, all states should continue to prioritize measures that support and protect them and all of our essential public servants.

Washington State of Mind

With all of these developments churning in the background, Washington remains transfixed on the transition of power to the next administration. But there are also other deadlines looming on the short-term horizon, particularly December 11, when the government’s funding runs out absent a budget bill or continuing resolution that extends it. When combined with the resumption of regional partial shutdowns and the inability of two polarized parties to come to an agreement on even a limited stimulus bill, political risks are clearly heightened over the near term.

Another round of stimulus payments — or lack thereof — has long captured the attention of Federal Reserve Chair Jerome Powell and other members of the Fed. On Tuesday, Powell said “there hasn’t been a bigger need” for an additional stimulus package from Congress in a “long, long time.” Without another round of stimulus, the chairman remains concerned that people and businesses will cut back on spending, particularly in light of increasing lockdowns. He may well be right, particularly if fears that 12 million Americans lose unemployment aid immediately after Christmas were to pan out.

Still, the market seems to be looking past the uncertainty bubbling below the surface on many fronts — at least so far. We hope that many of these questions are quickly resolved and both political parties can find some common ground, so both the country and the economy can move forward to focus on overcoming the effects of the pandemic. However, we are also aware the markets’ attention can turn on a whim, so we must remain prepared for any bumps along the road to recovery as we continue to manage the retirement assets our investors entrust us with.

Disclosures:

This information is intended for institutional use only and is not intended for individual investors or the general public. This article includes links to external websites. While we believe this information to be reliable, we cannot guarantee its complete accuracy.

Please note that this content was created as of the date indicated and reflects the authors’ opinions. These opinions are subject to change, without notice, due to market conditions or other factors.

This is not intended as a solicitation nor does it constitute investment, tax, or legal advice. Reference to any fund or asset class is not a recommendation to buy, sell, or hold that fund or asset class. Neither ICMA-RC nor its subsidiaries are responsible for any investment action taken as a result of the information provided herein or the interpretation of such information. Investors should carefully consider their own investment goals, risk tolerance, and liquidity needs before making an investment decision. Investing involves risk, including possible loss of the amount invested. Past performance is no guarantee of future results.

When Funds are marketed to institutional clients by our Investment Only (IO) team, the Funds are offered by ICMA-RC Services, LLC (RC Services), an SEC registered broker-dealer and FINRA member firm. RC Services is a wholly owned subsidiary of ICMA-RC and is an affiliate of VantageTrust Company, LLC and Vantagepoint Investment Advisers, LLC. Learn more at www.vantagepointfunds.org.

Disclosures:

This website is for institutional use only and is not intended for individual investors or the general public.

This information is intended for institutional use only and is not intended for individual investors or the general public.

Please note that this content was created as of the date indicated and reflects the authors’ opinions. These opinions are subject to change, without notice, due to market conditions or other factors.
This is not intended as a solicitation nor does it constitute investment, tax, or legal advice. Reference to any fund or asset class is not a recommendation to buy, sell, or hold that fund or asset class. Neither ICMA-RC nor its subsidiaries are responsible for any investment action taken as a result of the information provided herein or the interpretation of such information. Investors should carefully consider their own investment goals, risk tolerance, and liquidity needs before making an investment decision.

When Funds are marketed to institutional clients by our Defined Contribution Investment Only (DCIO) team, the Funds are offered by ICMA-RC Services, LLC (RC Services), an SEC registered broker-dealer and FINRA member firm. RC Services is a wholly-owned subsidiary of ICMA-RC and is an affiliate of VantageTrust Company, LLC and Vantagepoint Investment Advisers, LLC. Learn more at www.vantagepointfunds.org.