Bridging the Gap

After a strong start to the week on positive vaccine news, the S&P 500 retreated from its all-time high. We are entering an interesting stretch of the pandemic. Virus numbers are worsening by the day, and states are tightening restrictions, yet we have multiple highly effective vaccines on the verge of approval. It will take time to manufacture doses, organize distribution, and drive uptake. The winter months are looking tough for the economy as states do what they can to stop the spread until widespread distribution hits in the spring. Though lockdown 2.0 will likely be partial and highly targeted, it will still come with a hefty economic price tag. This is why it is essential that policymakers can bridge the gap with more stimulus for a few months. These efforts are being hamstrung at the moment by a stubborn Congress and a slow transition in the executive branch.   

As the week went on, markets appeared to grow increasingly concerned about the lack of progress in Congress and an apparent policy rift between the Fed and the Treasury. To that end, we saw the market shifting towards a more risk-off posture by the end of the week. Most notably, this showed up in a decent move lower in 10-year treasury yields. We’ll see if these trends persist, but it was a notable departure from the reopen trade sweeping markets over the last several weeks. Perhaps this is just a reflection of short-term caution amid long-term optimism. We believe it remains difficult to be overly bearish with a vaccine on the way, low rates, and an abundance of money flooding the economy. 

Rather, we are inclined to view weakness over the next few weeks to months opportunistically. As we’ve said in recent weeks, earnings have held up much better than expected and are a sign of company strength. Many have taken the pandemic as an opportunity to pull forward efforts to digitize operations. Ultimately, we believe these initiatives have the potential to improve productivity on the other side of the crisis and serve as a catalyst for further earnings and dividend growth. With this outlook and interest rates that we expect to stay low for years, we presume there remains no alternative to stocks. We believe it is prudent to stay invested and to take advantage of any pullbacks. 

With pullbacks in mind, we have our eyes on the Georgia run-offs. Though polls are heavily favoring the Republican candidates, it isn’t unreasonable to think they could dip as resources pour into the state for Democrats. With the balance of the Senate still in play, this could cause some palpitations for the market. We’d look to take advantage of such an opportunity with a particular eye towards the reopen stocks that have done so well of late. 

Preston May, CBE®
Research Analyst

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