The US economy is struggling to wade through the darkest days of the pandemic. US payrolls fell 140K in December vs. an expectation for a gain of 50K. The losses were confined mostly to retail, travel, and leisure and suggest that the US is moving deeper into lockdown as the pace of the virus accelerates. $600 stimulus payments, PPP loans, expanded unemployment benefits, and a host of other provisions have been deployed over the last week. The hope is that these measures can cushion the economy until immunizations reach critical mass. In the market's eyes, however, more is better.
With this week's Senate runoff in Georgia, Democrats have won complete control of Congress. A 50/50 split in the Senate means that Democrats will have a one-vote majority with Vice President-Elect Kamala Harris holding the tie-breaking vote. This narrow majority limits the scope of policy that can get through the chamber. Still, a one-vote advantage is enough to advance some policy initiatives and change the calculus for Cabinet nominations. Most importantly, for the market, corporate tax increases are back in play, and President-Elect Biden will have greater flexibility in selecting more progressive Cabinet members.
Taxes and policy matter, but right now, the market is looking at Democratic control through one lens. The number one priority of the new administration and the next Congress will be passing additional stimulus. The first round will come in the form of expanded direct payments. A second and larger package could combine stimulus dollars with high priority agenda items like infrastructure. We have seen stocks levered to these themes moving sharply higher in recent days. Industrials and materials have picked up significantly.
Interest rates are also reflecting the potential for higher stimulus. More money in the economy and a weaker dollar have given rise to inflation expectations. With that, the 10-year treasury yield has moved north of 1% for the first time in months, and the yield curve is at its steepest level in years. Bank fundamentals improve as rates move higher, and inflation expectations rise. These changes have banks on the move as well.
Despite softness from some of 2020's big winners in the tech space, the market continues to advance. Industrials, Financials, and materials look poised to take the baton with a brighter picture emerging out of the darkness of the pandemic.
Preston May, CBE®
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