The pace of the economic recovery is slowing, as governments close restaurants and other facilities to stymie spread of Covid. But approval and widespread distribution of at least two vaccines ensure the economy will soon get a booster shot (figuratively) even as the population gets a booster shot in the arm (literally). Within 6 months, roughly 50% of the U.S. population will be vaccinated, unleashing a surge in economic activity as people return to a more normal lifestyle. Investors are looking across the valley immediately ahead to better conditions early next year, which is why the stock market continues to rally. There’s more to go.
As widely expected, Moderna’s vaccine gained approval from the FDA on Thursday, which makes two for two for new mRNA-based vaccine technology. Pfizer starting shipping its vaccine a week ago and vaccinations started at the beginning of last week. Moderna followed suit one week later. Other vaccines are likely to pass muster over the coming weeks and months, including a one-shot vaccine from Johnson and Johnson. It’s possible that as many as 100 million Americans could be vaccinated by the end of the first quarter and 50% of our entire population by the end of the second quarter. Those vaccinated plus those who have recovered from Covid will greatly reduce transmission of the virus. As Covid cases recede, people will start feeling comfortable engaging in normal activities and businesses will reopen and hire workers back.
In March 2020, U.S. economic activity collapsed, but we weren’t alone. The collapse was global, including countries like Sweden that didn’t shut down any businesses. The Swedes also experienced a recession because their exports to Europe declined sharply in response to shutdowns on the continent. But in the spring of 2021, we will see a globally synchronized economic recovery that benefits everyone. Economic recoveries globally will be mutually reinforcing.
The investment implications of the reopening may be uneven, but will be widespread and powerful. Some companies may recover more quickly. Others may take a bit longer. Overall, we expect stocks to perform well in this environment, but stocks that benefitted the most from the Covid dynamic now have full valuations, so they should benefit less from the recovery. Others remain depressed and much of their recovery still lies ahead. Stock selection will be increasingly important in the coming years. As businesses recover, profits will rebound and the stock market is already anticipating these gains. This recovery is likely to last for at least a few years, since it will take that long for so many unemployed people to be rehired. On the other hand, bonds will have a tougher time. Yields are so low, there’s limited upside in bonds, but considerable downside, if rates rise. So, a highly defensive approach towards bond selection is required, even though we see little risk of a sharp rise in inflation in the coming quarters. So, we continue to find opportunities both in equities and in bonds. And we can also revel in the prospect that vaccines will vanquish Covid. That will make this a joyous holiday season.
NB: Due to the holidays, we will not publish next week. We wish all of our clients, business partners, vendors, and readers a celebratory, joyous holiday season.