Weekly Market Update 12/21/2020

The economy is likely to weaken further as 2021 begins. Specifically, GDP growth, which could slow to 3%-5% in the now-ending period, might then ease to 1%-3%—or less—in next year’s initial quarter. And even that listless showing assumes a COVID- 19 relief package will pass the Congress. Encouragingly, as we went to press, there appeared to be some signs of progress in negotiations.

The reason for our caution is the coronavirus, which is raging anew as 2020 winds down, with record infections, hospitalizations, and deaths reported again in recent days. The past few weeks also have seen an uptick in weekly jobless filings, as well as business closures (especially restaurants), locally mandated lock downs, and reduced spending by consumers. All of this will depress activity in the early part of 2021, even without a repeat of the wide shutdowns seen in 2020.

However, The situation then could get better rather quickly, with mass distribution of COVID-19 vaccines by spring likely to bring a drop in infections and deaths. Combine that with likely recoveries in consumer spending and business output, and the presumptive benefits by then of a more comprehensive fiscal stimulus package and GDP growth could recover strongly by the second quarter.

Following that probable spring spurt, things should settle back onto a slow, but stable, growth path, with the economy again moving forward by 2%-3%, just as it had before a turbulent 2020 brought a plunge in activity in the spring and a sharp, but partial, comeback over the summer. The Fed commitment to long-run monetary support will be helpful.

Encouragingly, even as the country struggles, investors continue to see the glass as half full. That is because the stock market often looks ahead by several months. So as we peer out to the spring, the rising use of vaccines could restore a level of confidence and security not seen in a year. That likely would invite greater spending by consumers and a consequent pickup in corporate earnings. The market is richly valued to be sure, but such an outcome could still bring modest equity gains in 2021.

Conclusion: With a reassuring outcome on COVID-19 likely to come sooner rather than later, we think investors should retain a decent weighting in equities

Source: Valueline.com