It’s been just two short weeks since the last market analysis and COVID-19 status update and, oh, how the world has changed.
The presidential election has been decided, the Democrats have retained control of the House, and the Senate will be decided at the beginning of January (the balance of Dems to Republicans will be quite close regardless of who wins).
Unfortunately, COVID-19 continues to set new records, and the growth rate of cases is beginning to increase again. Yet despite the bad news, markets are up strongly as the uncertainty has decreased following the election results, and vaccinations are closer to becoming a reality.
Accordingly, we are going to focus on breadth today, with the first section on the election, the second section on COVID-19, and the third on the economy and markets. There’s a good deal to cover, so let us begin.
United States elections
As with any political topic, there are multiple (and sometimes controversial) lenses through which to view this election. As we have all been inundated with the nuances on the history of the electoral college, the county-by-county results, the demographic shifts of rural America and many other previously unknown factoids, let us skip the details (and hopefully the controversy), and instead, zoom out.
Regardless of our individual political leanings, first and foremost, as Americans, we should be proud of the process. Thomas Jefferson once wrote, “We do not have government by the majority. We have government by the majority who participate.” And Americans participated in this election in remarkable fashion.
Chart 1 shows the percentage of eligible Americans that voted, and participation in the 2020 election was the highest since 1900 when McKinley was elected.
That means that if we start with roughly 328 million Americans (including men, women and children), and remove the children and ineligible adults, we have roughly 240 million voting age Americans who can vote.2 Of those 240 million citizens, roughly 161 million or 67 percent of them voted. This is higher than every single election over the past 120 years, and something to be very proud of. At a minimum, we can say the president-elect represents an active voting population.
Second, to those who say this country doesn’t represent them any longer because their party lost (and I have heard that over several presidential elections now, regardless of which party won), I offer some perspective through numbers.
Thus far, there have been roughly 76 million votes counted for former Vice President Joe Biden, and roughly 71.4 million votes for President Trump.3 Regardless of which party we are affiliated with or support, that means more than 70 million people also voted as we did. That is quite a community, and we should be confident that there are many places in this great country where people share our political views.
For many Americans, one of the largest benefits of the election was the distraction from the incessant drumbeat of the COVID-19 march … and unfortunately, its case growth hasn’t improved, but has worsened.
As I have argued time and time again, the market has been primarily (not exclusively) focused on the growth rate of the COVID-19 viral outbreak, not the absolute levels. Given daily growth rates had been falling since April, I have argued this was a large contributor to why markets have been so optimistic. Perhaps interestingly, even as growth rates have increased again, markets have remained optimistic. Chart 2 demonstrates how the daily growth rate in the U.S. has changed since the beginning of May.
While those growth rates are not yet back to previous levels seen in April there is nonetheless a clear (and frustrating) increase in case growth since the middle of September that continues.
The question, then, is why are equity markets up?
As Nov. 11, 2020, there are more than 51 million confirmed cases worldwide, and more than 10 million of those cases are from the United States. And, unfortunately, as Chart 2 above demonstrates, the growth rate of cases is picking up speed again.
Other than the election uncertainty disappearing, I argue there are two main drivers:
- As the growth rate of cases has risen, the growth rate of deaths has not.
- The developments on treatment and vaccinations have been dramatic, and tangible.
On the first point, Chart 3 helps clarify the dynamic.
Starting with May 1, the growth rates of cases and deaths was similarly and unsustainably high. Roughly speaking, with a 3 percent growth rate, the number of cases (and deaths) would be doubling every 24 days. That is unsustainably high.
Fortunately, both rates slowed, but as case growth increased in July, and again is increasing now, death rates have stayed down. This may have occurred for several reasons such as:
- Treatment has improved.
- We have found better ways to protect the more vulnerable populations.
On the treatment front, we have received good news from several different sources recently, and the equity markets reacted in kind with equity markets rallying between 2 percent and 4 percent on Monday alone.6 While there are many sources of information to digest, the primary was the press release of Pfizer7 and BioNTech who have had some very strong findings of late-stage data.8 In short, results indicated that the vaccine being developed was more than 90 percent effective for those that received two vaccinations three weeks apart.
With that said, a note of caution is important. Among other things, this data does not address non-symptomatic patients, and it also doesn’t yet address severe cases. In short, we don’t yet know enough, although markets were clearly encouraged. As with anything this complex, and particularly when developed so quickly, it will take time to understand the various dimensions of efficacy. Nonetheless, we continue to watch closely (and hopefully).
Markets and economies
For this next section, let’s look to the consumer, the economy, and, as follows, the equity markets.
As we’ve discussed before, as goes the U.S. consumer, so goes the economy. In an economy of roughly $21 trillion, the U.S. consumer is one of the prime determinants of growth. As such, when the COVID-19 shutdown occurred in March, and consumers were forced to stay home (and therefore stopped spending money), the economy stalled.
One of the best barometers of the consumer is retail sales. This essentially measures the total purchases of durable and non-durable goods from all food service and retail stores and is produced by the U.S. Census Bureau on a monthly basis.
The summary from Chart 4 is:
- The consumer took an unprecedented pause on spending.
- The consumer picked up where they had left off with remarkable speed.
It’s also worth noting how deep and harsh the consumer pullback was in March and April when compared with the 2007-08 crisis.
Zooming out further, we can then turn to the overall U.S. economy. While the consumer is important, there are, of course, other contributors such as business and government (both local and federal).
One way we can get a better sense of the overall status is by looking at the global domestic product, which is quite literally the total value of goods and services produced by a country during a specific time period.
Chart 5 provides that view, and while the overall economy has clearly rebounded, it is still not back to the trend of growth that existed before the crisis.
And to a large extent, this seems to be consistent with our collective experiences. As a country, we have resumed our lives in the manner possible, but difficulty, indecision, and caution abound, and we are largely seeing those emotions on display through the overall economic output.
Businesses have closed, companies have had layoffs, furloughs have occurred, and entire segments of the economy have changed entirely (entertainment, leisure, retail, and the like). All of which results in lower economic throughput.
This, then, brings us to our final chart for this update. The total performance of the Standard & Poor’s 500 (S&P 500) for the year.
As we all experienced, this chart tells the story of two distinct experiences. First, a very rapid and fear-stricken sell-off in February followed by, second, a steady and fairly remarkable increase since the low on March 23 that has now placed equity markets in moderately positive territory for the year.
The question, therefore: is this right?
The short term is remarkably confusing and unpredictable, so in the short term, I offer no perspective.
Yet, when considering the long term, we have seen:
- A consumer who was clearly rattled and yet has largely resumed activity.
- A pandemic that was and remains terrifying along with unprecedented coordination of research.
- A government that provided trillions of dollars of monetary and fiscal stimulus.
- Stability and liquidity in markets that calmed the nerves of its many participants.
- And an optimistic, yet tangible, path to a vaccination that is not only providing hope, but the potential for the mitigation of COVID-19.
Thus, I would argue and therefore summarize equity markets are within reason, but clearly optimistic.
Accordingly, this is not the time for additional risk taking. Continue to batten down the hatches. Focus on creating and executing a plan that addresses your needs, and please try to ignore the short term.
I believe we still have difficult days ahead but, while risk is to the downside, I also see many reasons to have hope, gratitude, and appreciation for the remarkable progress being made.
In closing, stay safe, and please turn off the investment news channels.
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1 Sources: US Census Bureau, https://www.census.gov/prod/2011pubs/12statab/election.pdf
3 https://apnews.com/hub/election-2020 as of Nov. 10, 2020
4 Sources: Bloomberg, World Health Organization as of Nov. 10, 2020
5 Sources: Bloomberg, World Health Organization as of Nov. 10, 2020
6 Source: Bloomberg, as of Nov. 10, 2020
9 Sources: Bloomberg, US Census Bureau as of Nov. 10, 2020
10 Sources: Bloomberg, St. Louis Federal Reserve https://fred.stlouisfed.org/series/GDP as of Nov. 10, 2020
11 Sources: Bloomberg, as of Nov. 10, 2020