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COVID-19 Vaccine Developments & Election Probabilities - Moving the Markets

Developments in potential Covid-19 vaccines and shifting 2020 election probabilities are going to be among the most significant movers of financial markets for the foreseeable future. Both “story-lines” have enormous implications for our future.

With new cases surging, Covid-19 will remain our public health, social, and economic nightmare until we have effective vaccines that immunize a large percentage of the population. Stay on the alert for news about “Operation Warp Speed”, the federal program that funds companies developing Covid-19 vaccines. Little is known about the details of how the billions of Operation Warp Speed dollars are being spent. We do know, however, that at least four companies have been funded to conduct the large-scale phase three clinical trials that must precede the introduction of a vaccine: AstraZeneca; Moderna Therapeutics; Johnson & Johnson; and most recently Novavax. Pfizer and BioNTech are also working together on a vaccine. Might we see a vaccine by the first quarter of 2021? New York Times CNN

The coming November elections are already on everyone’s personal radar but shifting outcome probabilities will move financial markets. Betting markets now strongly signal a Biden win but are also suggesting the possibility of a Congressional sweep by Democrats. PredictIt RCP One implication (of many) of such a sweep is the likelihood of higher corporate and personal income taxes, causing investors to recalculate the coming planning landscape. Keep in mind that four months is a long time when it comes to national elections and that the betting markets and polls are not infallible. CNBC Axios New York Times CNBC

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Jobs Are Coming Back But Will That Hold?

ADP and Moodys released June's jobs report that showed an increase in private payrolls of 2.37 million.  At the same time, in an incredible reversal, May's number was revised from a loss of 2.76 million to a gain of 3.06 million. CNBC  Stocks have been rallying based on the economy reopening.  The S&P 500 Index was up almost 20% in the second quarter, which was the second-best quarter on record and the best since 1998.  WSJ  Yahoo Finance  

Meanwhile, the repairing of the economy will be dependent on the virus being contained and recent news for many states has not been good.  New virus cases initially peaked in late April and were steadily dropping through the beginning of June.  But since then, cases have increased dramatically and hit new highs.  The increases are mostly in the south and west, while cases continue to drop or are steady in the northeast.  Reuters  In testimony this week in front of a Senate panel, Dr. Anthony Fauci warned new cases could top 100,000 per day about double where they are now. NYT  Many states with escalating cases are now closing down bars, beaches, and restaurants. USA Today  Stocks have still climbed.

Stocks and bond yields are popular leading indicators to gauge where the economy may be heading.  I keep hearing from many that they feel stock markets are being too optimistic.  And bond yields are now heavily influenced by the Federal Reserve.  So, let's turn to another indicator, copper.  I have written about copper in the past as a barometer for future economic activity because of its widespread use in manufacturing and housing.  Here is a chart reflecting YTD copper futures contract prices:

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Powell's Put and Other Stock Market Observations

How can the stock market be experiencing such a recovery from its March plunge when much of the economic and Covid-19 data is negative? Many of you may be asking this. You wonder if it is irrational market behavior. This is the proverbial “good question.” There are various theories and explanations. FiveThirtyEight

One powerful explanation is sometimes referred to as “Powell’s Put.” Basically, “Powell’s Put” is a shorthand way of observing that Fed policy has become so supportive of economic growth and indirectly the stock and bond markets that it has put a safety net under market risk. Not everyone views this as necessary or healthy. Washington Post

A second theory is that, as we have become fond of saying, stock investors look forward and are therefore projecting, rightly or wrongly, where they think the US and global economies will be six months, a year or two from now and see a strong recovery. Note that the US stock market historically has been a leading economic indicator of US economic performance.

Two more explanations include the valid observation that some parts of the economy are still doing well or at least noticeably better. Why should not stocks in those industries be performing well? One size does not fit all when it comes to stocks. It is also true that interest rates are so low that investors lack an attractive asset class alternative to stocks, safety of principal aside (as if safety can ever be an aside!).

A Word of Caution! None of the above theories, observations, or explanations provide any kind of a guarantee for an equity investor. Fed policy may change, or the Fed may run out of policy ammunition. Fed Chairpersons come and go. If earnings fail to pick up with reopening, investor optimism about looking out into the future can wane quickly. The economy could recede further dampening the performance of virtually all companies with few exceptions. Lastly, investor risk appetites shift too and could tilt again to safety of principal regardless of yield. Even though current stock market behavior may not be as irrational as it seems on the surface, there is no risk freebie for stock market investors.

  • Covid-19 New Cases Surge in the US: With approximately 4% of the world’s population, the US has experienced around 25% of the deaths attributable to Covid-19. Moreover, the number of new cases continues to increase although the death rate is coming down. It is important to look at the data on a state by state basis. Maine and New Hampshire are among the states where new cases are decreasing. Massachusetts and New York are in the staying roughly at the same rate category. Florida is among the states where new cases are increasing. New York Times

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The Stock Market Tug of War

After a big run up the previous months, last week the U.S. stock markets dropped almost six percent in one day.  Driving stocks down were a reaction to virus cases accelerating in many states and the realization it will take a long time for the economy to fully recover.  NYT  Then on Monday this week, the Federal Reserve announced it will start buying individual corporate bonds and created more credit facilities to expand bank lending to small and medium businesses.  Bloomberg  Stocks responded accordingly this week and have been up strongly.  So, stocks are locked in a great tug of war.  On one side is the Federal Reserve and Congress on the other is news about rising virus cases and the economic outlook.  It is also a tug of war between hope and faith in government support versus the reality of a tough economic environment and a stubborn contagious virus. 

It is apparent that the Federal Reserve and Congress, are going to use every tool or policy they have to support the economy and markets.  The Fed can react very quickly to markets and events, Congress takes more time.  But, so far, for stock investors, it’s the hope and faith in government support that has been winning the tug of war.

  • Steroid Drug Offers Hope in Reducing Virus Deaths:  As health care researches learn more about the COVID-19 virus, one area of focus has been the body's extensive inflammatory response.  Many current drugs used to reduce inflammation are being explored to see if they can help.  Though the results are preliminary with a small human trial, one common and cheap steroid called dexamethasone is showing promising results in reducing deaths.  I don't want to be overly optimistic since the results are preliminary, but some scientists are calling this a "major breakthrough."  Reuters

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The US May Jobs Report Shocks

In a major surprise, the US unemployment rate dropped in May to 13.3% from the 14.7% rate in April. Some economists had predicted that the rate would climb again in May and might reach 20%. We question the seeming disconnect between the number of people filing for unemployment insurance and the number counted as unemployed but otherwise have no reason to doubt the accuracy of the data. This is good news. FiveThirtyEight Axios

The unemployment rate is a crucial economic metric. While it lasts, unemployment insurance mitigates the financial risk, but the unemployed are financially vulnerable and some may also suffer emotionally, creating health and psychological risks. A high unemployment rate lessens economic demand for goods and services, hurting the entire economy and the broader community. The unemployment rate is the best indicator of how well the economic engine is performing.

  • Economists Are Somewhat More Optimistic: Two weeks ago, we brought a survey of 34 economists to your attention. We like this survey, conducted jointly by the University of Chicago Booth School of Business and FiveThirtyEight, for its objectivity and methodology. Moved by the May job news, these economists are now slightly more optimistic than two weeks ago. There is no consensus for a quick bounce back, however, causing us to stick with a relatively slow recovery scenario assumption. FiveThirtyEight

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Stocks Keep Flying Higher

The news for the last week has been brutal, to say the least.  Riots have broken out in major cities, unemployment is rapidly increasing, China reduced freedoms in Hong Kong reigniting trade tensions, and coronavirus deaths continued to climb.  The lone feel-good news item was SpaceX successfully launched the first orbital mission from U.S. soil in almost a decade.  Axios  But some market watchers are wondering if the stock market is what's really heading to outer space.  Despite all the tough economic and political news, the stock market continues marching higher and as of this week, the S&P 500 was down year to date less than 5.0%.  It is truly a remarkable turn of events for investors.

The events of the last few months reinforce how difficult it is to time investing.  Very few predicted COVID-19 would have such a devastating effect on society since other viruses over the last two decades had virtually none.  Equally, few would have predicted such a dramatic and swift rebound with the backdrop of very bad economic news.  I am starting to see articles about investors who sold out of the markets when they were down while waiting for better news before reinvesting.  The good news has still not arrived and they may have missed most of the recovery.  It’s another example of why trying to time the stock market is so difficult and why a long-term view, sensible asset allocation, and a rebalancing strategy often leads to the best investment outcome.  A popular investment saying nowadays is that investors are rewarded for "time in the market, not timing the market."  That has certainly been true this year. 

  • COVID-19 Facts – What We Know:  After several months of living with COVID-19, researchers are discovering more and more about the virus:  It doesn't seem to spread from surfaces as much as we initially thought; wearing masks helps a lot; we will probably be living with the virus for a while, and it produces more symptoms than first expected.  The article highlights these and other known facts about the virus.  NYT

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Let’s Plan on a Slow Economic Recovery

A recent survey asked a group of macro quantitative economists to predict the likely trajectory of the US economy, as the US struggles to reopen. Our reservations aside about the futility of trying to predict too far into the future, this “expert” survey confirms my working hypothesis that the recovery will likely take years. There is a range of opinions, but over half of the economists foresee the US economy not returning to pre-crisis levels until the second half of 2022 or later. To use a medical analogy, the pandemic has been an economic heart attack. Yes, we expect full recovery, but the patient in recovery is going to need time, support and understanding.  Expecting a sharp recovery without plateaus or setbacks is wishful thinking, as far as I am concerned. Simply skimming the linked article will give you a sense of what economists are thinking for now, with survey updates planned.

  • Powell’s View: Fed Chairman Powell is more optimistic, seeing the recovery stretching into 2021. His views carry weight with me, but he has no way of knowing for certain. New York Times

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Markets React Sharply to Good and Bad News Related to Potential Vaccine

The markets went for a little roller coaster ride this week.  It started with a Boston company, Moderna, releasing interim positive results from its first human COVID-19 vaccine trial. It stated there were no issues with participants producing antibodies needed for an immune response and they tolerated the vaccine well.  WCVB  As expected, the markets reacted positively with stocks gaining sharply and analysts believing a vaccine could start being available by year-end.  Morningstar  The next day stocks dropped sharply as skeptics stated not enough data was released for outside rigorous analysis and questioned some assumptions in the press release.  Statnews  By Wednesday, stocks were reacting to economic data and bounced back.  CNBC

The volatility in stocks this week is the new normal for investors.  Any good or bad news regarding containing the virus or finding a vaccine will have an outsized effect on the investment markets.  Until there is clarity regarding the containment of the virus or a vaccination, market volatility will continue. 

  • Planning for a Vaccine:  The first human trials for vaccines are wrapping up and plans are starting to unfold as to which countries and workers receive it first.  Healthcare workers and those in essential services will be at the front of the line, but it gets a little trickier after that, including which government agencies are involved in mass dissemination.  WSJ

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Reopening and the Reinvention Story of Tock

The US economy has begun to reopen. The early stage efforts appear not to have generated a significant increase in new diagnosed Covid-19 cases yet in most states. Axios But the various models continue to predict ominous Covid-19 death levels. NPR As reopening expands, there will be many forms of “voting” or “betting” occurring. Some public health officials (e.g., Dr. Fauci), concerned that the health risks of congregations remain high, are voting for caution. CBS News Federal, state and local leaders are tilting toward more aggressive reopening or more conservative, depending on their perspective, knowing that they face election accountability.

Many US stock investors have bet that the reopening is likely to be relatively successful, given that the S&P 500 Index has quickly recovered almost 60% of its 34% flash bear market loss in the face of plunging economic metrics. Of course, stock investors get to vote every day, so may change their votes rapidly if the reopening starts to falter. Lastly, you and I will vote on when we feel safe re-engaging in certain economic activities. You can reopen a restaurant but when will the customers return in critical numbers? You can restart sports events but when will fans return in masse to the arenas? Washington Post

  • The Story of Tock: For sure this sounds like a Disney movie, but I share it as an example of how many businesses and non-profits will need to reinvent themselves as a result of the pandemic. Tock, a startup, featured a prepaid reservation system for high-end restaurants. In 2019 it processed $350 million in transactions for restaurants while employing around 100 employees. When the pandemic hit, it faced an existential crisis where its revenues could go rapidly to zero overnight. Within months, Nick Kokonas, the legendary restaurant entrepreneur, reinvented and retooled Tock as a system that processed takeout orders for restaurants. Tock is on track today to process $1 billion in takeout orders annually for restaurants. Meanwhile Open Table is laying off employees. And this is only half the story, as Kokonas and his restaurant partners have successfully reinvented their own acclaimed restaurants to deliver takeout while maintaining a strong commitment to employees. CNBC Tim Ferriss Show

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States Start Reopening Businesses and Tracey Daigle in the News!

In the U.S., we are only a week or two past the peak in deaths attributable to the coronavirus.  It is against this backdrop that governors are trying to make decisions on how to reopen state economies even as many states are still seeing increases in infections.  Axios  Though the projections are that the deaths will gradually drop during May and the following months IHME, it is a balancing act fraught with risks.  WSJ  So, we are now embarking on the next stage of this epic event where states are experimenting with opening businesses. CNN  Despite the different strategies, rules, etc., the states are all looking for the same thing – sustainable practices that will allow all businesses to resume without overwhelming the healthcare system.  So far, investors have been optimistic in anticipation of businesses opening with markets gradually moving higher the last month, despite the loss of 20 million private-sector jobs in April.  MarketWatch  As mentioned in last week's email, the numbers to watch for the next couple of months are not economic, but the trending of new cases, deaths, and hospital's ICU capacity.  If those numbers are stable and manageable, the opening of the economy will continue, leading to businesses starting to recover.

And now for some RSWA news!  We are happy to announce that RSWA's own Tracey Daigle was featured in an article in Maine Biz and was also on the cover!  The article highlights women who are leaders in Maine's wealth management industry and they rightly recognized Tracey for her leadership position.  Congratulations Tracey!  Maine Biz

  • Warren Buffett Speaks to Investors:  Berkshire Hathaway held their annual meeting this past week.  Thousands of Berkshire investors usually descend on Omaha for the dubbed "Woodstock for Capitalists" gathering, but this year's meeting was held virtually.  During the Great Recession crisis, Mr. Buffett was an optimistic and reassuring voice despite the calamity.  That was on display this meeting as well, but he was also very cautious and quite happy to have a large cash reserve on hand.  NYT

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