Today we celebrate another new addition to the family: Baby Conrad arrived on Friday. Happy and Healthy and at home with his mom Amanda and father Anthony! Congratulations to the New Parents!
Turbulence and Volatility
These days are filled with turbulence. Political, economic, and social unrest have taken root across America during a full-blown public health crisis. Economic uncertainty for millions of Americans remains a certainty as discussions regarding a second round of fiscal stimulus have reached a stalemate. Protesters from both sides marched on Washington on Saturday, ultimately clashing in physical violence. The promise of a coronavirus vaccine has been eclipsed by the number of new Covid-19 cases: Over the past week, there has been an average of 145,712 cases per day, an 80% increase from the average two weeks earlier.
In today’s Market Update, we will examine this environment and assess the potential impact on the markets.
Since the markets cheer a balance of power in Washington, all eyes are now on Georgia, where two Senate races will be settled on January 6, 2021. These remaining Senate seats are equally prized by Republicans and Democrats since the winners will determine the Senate majority. One race pits David Purdue (R) against Jon Ossoff (D), where razor-thin margins are expected, once again, to favor Senator Purdue. The other race is far less predictable: Senator Kelly Loeffler (R) captured 25.9% of the November 3rd vote, while Reverend Raphael Warnock (D) locked in 32.9%; the rest of the votes were distributed among a smattering of candidates representing both parties. We think the Loeffler/Warnock race is the lynchpin and, because of the striking contrast between candidates, will dominate the headlines. Those on the left accuse “billionaire Loeffler” of looking out for herself during the pandemic by dumping stocks (her husband is chairman of the New York Stock Exchange). Those on the right accuse Reverend Warnock (whose priorities include a living wage and affordable health care) of urging Americans to “repent” for supporting President Trump for indulging a “worship of whiteness.”
If the Republicans are successful, political gridlock will prevail and President-elect Biden will be the first newly elected Democrat since 1884 to assume the Oval Office without a fully Democratic Congress. On the other hand, if the Democrats are successful, one can expect sweeping policy changes to take place over the next two years. Until the Senate winners are determined, expect continued market volatility.
Today, the House of Representatives is joining the Senate back in Washington to wrap up the post-election term. Both bodies of Congress agree they want to pass a second pandemic relief package before the inauguration of President-elect Biden on January 20, 2020, but heartily disagree on how much to spend and what to include. Senate Majority Leader McConnell is pushing for a $500 billion bill that does not include a second stimulus check of $1,200 for eligible Americans, while House Speaker Pelosi is urging approval of the $2.2 trillion “Heroes Act” that passed through the House last month—and does include a second check. Neither side wants to budge.
One argument for a larger stimulus package is that it would fuel GDP recovery; remember, approximately 70% of U.S. GDP comprises consumer spending. With the Christmas shopping season in full swing, an extra $1,200 for eligible Americans would help speed the 2020 economic recovery. But there is also a bigger issue at play than the immediate. Before the pandemic, the hard reality of income inequality was in plain sight. A 2019 Federal Reserve study revealed that 40% of American families could not afford a $400 surprise expense. The pandemic has exacerbated this circumstance, especially for essential workers and those in the service industries. An economic recovery to 2019 levels will require that the “have-nots” participate as fully as the “haves.”
While Fed Chairman Jerome Powell has repeatedly urged Congress to pass a stimulus relief package, some of his other messages have been overlooked amid a bitter presidential election. Recently, members of the Federal Reserve unanimously adopted a new monetary policy framework that relies on achieving a combination of two measures at the same time:
- 3.5% – 4.5% unemployment, the Fed’s standard estimate for “full employment;” and
- 2% average inflation, as measured by the PCE (Personal Consumption Expenditures).
The Federal Reserve expects to maintain near-zero interest rates until both these goals are met, but here is the rub: Achieving these conditions at the same time would be a historical anomaly. In fact, some prominent economists have suggested this new framework was inspired by Peter Pan, whose advice was to think of an impossible thing each morning.
At PWA, we think the Fed’s new policy framework will be more evolutionary than revolutionary—but it does have important implications for fixed-income investors. Within this new policy framework, another extended period of near-zero interest rates for retirees could be overwhelmed by the Fed’s efforts to reach its average 2% inflation target. An inflation overshoot may occur periodically, especially when married to stagnant post-pandemic employment scenarios.
Social Turbulence and A Public Health Crisis
Our differences are being laid bare before the world, as it appears only half the nation was equipped to receive last week’s messages from President-elect Biden. With President Trump unwilling to concede, social unrest remains likely to continue.
Additionally, our collective psyche is being tested by “pandemic fatigue.” With the holidays quickly advancing, it will prove challenging to “socially distance” from our families and friends, yet we must remain vigilant until a vaccine is made widely available. In our October 5th Market Update, we reviewed “Operation Warp Speed” and the status of the Phase 3 clinical trials for all vaccine candidates. Following is our brief synopsis of the Pfzier/BioNTech that made headlines last week when its 90% effectiveness was announced:
Unlike a conventional vaccine, the Pfizer/BioNTech vaccine works by introducing an mRNA sequence—a messenger molecule that tells cells exactly what to build. The mRNA is coded to mimic a specific antigen, i.e., any foreign substance that your immune system does not recognize and tries to fight—like bacteria or a virus, even pollen. Once the antigen is recognized by the immune system, it is prepared to fight the real thing.
Since it is not produced using active infectious elements, this “RNA vaccine” is considered safer than conventional ones. Plus, it is purportedly faster and cheaper to produce than traditional vaccines because it uses standardized processes, making it more readily scalable.
Once the Pfizer/BioNTech vaccine receives FDA approval, the logistical hurdles surrounding its manufacturing and quality control are abundant. For example, the vaccine must be shipped frozen at –94 degrees Fahrenheit, an ultracold temperature that is nearly impossible to maintain without specialized freezers—typically found at a large hospital or university medical center. To address this requirement, Pfizer has devised “thermal shippers.” Unopened, the thermal shippers can keep the vaccines frozen for up to 10 days; upon opening, the vaccines must be replenished with dry ice within 24 hours, then every five days. Further, the thermal shippers can be opened no more than twice a day to take out vials and must be closed within one minute.
Here is another hitch: The Pfizer/BioNTech vaccine requires two doses per person over time, and the second dose must come from the same manufacturer as the first. The second dose must be administered 21 days after the first—this means that having the right number of vaccines for the right people will require extensive and careful record keeping.
NOTE: More good news! Early this morning, Moderna reported that its Covid-19 vaccine candidate (also RNA based) was 94.5% effective in preventing the disease, based on interim data from a late-stage clinical trial. Moderna joins Pfizer as the second United States-based company in a week to report clinical results that far exceed expectations.
At PWA, we believe the collective actions of the Federal Reserve and the federal government will help limit the economic damage that likely results from rising Covid-19 cases. We further believe it is incumbent on us, as fellow citizens, to slow the spread of the virus. Although inconvenient, wearing a mask and practicing social distancing will help to keep the economy open. We favor inconvenience over economic shutdown!
Political, economic, and social turbulence is the “stuff” of market volatility. One stressor would be sufficient—in tandem with a global pandemic, the combination of the three is a potent brew. As stated in last week’s Market Update, we expect the markets will remain volatile and rangebound. In English: We expect wide swings with little net movement over the next few months. Since August 28th, the S&P 500 Index has traded between 3580 and 3232. Even with the very promising news of a vaccine, it closed last Friday at 3585. We expect more of the same. That said, as we move through 2020 and into 2021, the measures taken to control the virus, the arrival of a vaccine, and the continued support of the economy from Washington will likely result in improved outcomes. As long-term investors, we will behave accordingly.
Thank you for your continued confidence.
Joseph A. Scarpo
Founder & CEO
 According to the Cleveland branch of the Federal Reserve, there are two common measures of inflation in the United States: the Consumer Price Index (CPI) released by the Bureau of Labor Statistics and the Personal Consumption Expenditures price index (PCE) issued by the Bureau of Economic Analysis. The CPI gets more press since it is used to adjust Social Security payments and is also the reference rate for some financial contracts, such as Treasury Inflation Protected Securities (TIPS). The Federal Reserve, however, states its goal for inflation in terms of the PCE.