As the Coronavirus continues to stalk the land, killing at last count over 260,000 Americans, word of at least three vaccines have been delivered for FDA approval. Distribution in some capacity is to hopefully commence by December 18. Mass inoculation is expected to take place soon after approval, and most of the world should be vaccinated by the fall of 2021.
All of this is wonderful and a testament to modern bio pharmacology. Still, even with this advance, the Center for Disease Control and Prevention (CDC) forecasts 440,00 Americans dying from the virus by the time it has run its course. This figure assumes people will be receptive to being inoculated with the vaccine as it becomes available, a big assumption at this point. Even with the delivery of the vaccine, the number expected to die exceeds the death toll from all Americans in World War II. There is no data yet of those who will live but have lingering aftereffects, from mental impairments to compromised respiratory and motor skills. In many respects, the Covid-19 virus has damaged the country in ways the Great Recession never did.
Many investors are expecting a return to pre-Covid-19 prosperity with the vaccine in 2021. That is not likely to happen. While Americans will return to some routines enjoyed before the pandemic hit, it is not likely that life will revert to status quo ante. One reason will be that many of the things enjoyed prior to the virus may not be available. Already over ten percent of restaurants have closed their doors, and the estimate is for 30 percent to shut down if the holidays do not provide a pickup. The same is true of many other forms of retail and entertainment such as apparel, department stores, theatres, nightclubs, and the like.
One less obvious victim of the pandemic may be the era of easy money. While the Federal Reserve will do what it can to keep interest rates low, foreign investors who buy the debt that finances the government’s deficits are showing signs of nervousness. One reason for the concern is the tug of war over the transition of power, an event that is making the US look like a country whose institutions are no longer respected by its own people. Why should foreign bond buyers trust in the value of the dollar when the country backing the same cannot conduct an election that both sides will respect?
A falling dollar is supposed to be good for an economy. It makes imported goods more expensive and thus less competitive. At the same time, domestic exports become more competitive due to being lower in price in foreign currency. But if interest rates need to be raised to prevent the decline from becoming a rout, then a key element of control of the country’s finances will effectively pass to foreign interests.
While control of the Senate will not be resolved until January 5 or so, Republicans have already indicated that they are not interested in continuing government spending going forward to match the amounts appropriated earlier in the year when the virus first hit the country.
Republican fiscal rectitude seems to be a function of who controls the White House, witness the approximate $6.7 Trillion in red ink the last four years that added an equal amount to the country’s indebtedness. In terms of deficits, this may be the time when the music stops.
The reality is that there are over 20 million Americans out of work due to the Coronavirus. Almost all programs put in place to address their plight will terminate on December 31. With another round of lockdowns beginning, more will join this number. For many, it will be a cold winter, no matter what the weather forecast says.
Since part of the emergency spending to address the pandemic ended September 1, the economy has been showing signs of deceleration. The deceleration was offset somewhat by the high savings rates of earlier this year.
The remaining programs are set to expire on December 31, and lockdowns are again becoming more prevalent in response to higher infections and mortality rates.
The economy is set to slow down even further. Economists at JP Morgan Chase bank are expecting the economy to decline 1 percent in the first quarter of 2021, after growing 2.8 percent in the fourth quarter of 2020. JP Morgan expects the economy to return to growth in the remainder of 2021, but only after a $1 Trillion stimulus package is passed into law sometime in the first quarter.
In terms of sectors, farmers are perplexed that there is a shortage of containers to ship grain to foreign buyers. It turns out that foreign sellers can use the containers to ship more expensive goods to the US, send them back empty, and still make more than shipping grain. Other goods pay up to eight times more than farm output for shipment in containers. If the containers are used to ship bulk items like farm output, the containers need to be cleaned out after use, which makes grain shipments even less attractive to the shippers.
Interest rates will remain low for the foreseeable future if the Federal Reserve has its way. The question is: will they be in control in an environment that has always depended on foreign investors financing our government deficits, but seldom to the extent that is true now. Expect interest rates to begin to climb upwards.
As mentioned previously, cheap money has found an outlet in financial markets. Instead of consumer price inflation, we have witnessed record-high stock prices and lows in interest rates. Any number of business startups have been funded that never would have seen the light of day were interest rates higher.
If interest rates do go up, expect to see inflation rates to follow. Also, it seems that there is more talk of a $15/hour minimum wage indexed to inflation. While such a wage will make more Americans who work for the minimum wage ineligible for government assistance, it will be inflationary. How much so depends on the time frame for implementation. Florida passed a $15/hour minimum wage law for their own state during the election.
The Stock Market
By most valuation metrics, the stock market is overdue for a correction. An accommodating Federal Reserve has held a correction at bay. Yields on non-investment grade bonds are down to 4.8 percent, a record low.
The issue is how much more will the rest of the world back the US, given its perceived political instability. Sectors that should do well in 2021 are commodities, companies that should spring back from 2020 like transportation, and industrial firms that can profit from a falling dollar.
Warren M. Barnett, CFA
November 25, 2020