Scott Bauer For CME Group
AT A GLANCE
- Traders will be watching whether new COVID-19 vaccines stay on their stated schedules, and whether they see any hiccups in distribution
- The job market and consumer confidence levels will also largely depend on the rollout of COVID vaccines
Pre-Thanksgiving is typically the time of year when many traders consider paring down positions for the holidays, but 2020 will be markedly different. There is simply too much going on and too much potential opportunity in the market through the end of the year.
I will focus on three inputs that may determine the course of the market until the end of 2020: the Covid-19 pandemic, jobs and consumer confidence. You can argue that these are all related, but at this point, almost everything is.
The Vaccine Trajectory
The Covid-19 pandemic is the obvious main concern that is on everyone’s mind both on a personal and economic basis. Everything hinges on the trajectory of potential vaccines and the measures that have to be taken until the vaccine becomes a reality both in development and distribution.
There now exists a light at the end of the tunnel that did not exist before November 9. Both Pfizer ($PFE) and Moderna ($MRNA) have announced vaccines with 95% efficacy. Pfizer expects to produce 50 million doses by the end of 2020 and another 1.3 billion doses in 2021. The Dow Jones, S&P 500 and Nasdaq indexes all closed at record highs on the Pfizer news while the Dow and S&P again hit new highs after Moderna announced its vaccine effectiveness days later.
The vaccine itself comes with logistical hurdles that make this project much more daunting than just producing a vaccine. The Pfizer version, for example, must be transported and stored at exceptionally low temperatures. However, the Moderna vaccine can last for up to six months when stored at standard freezer temperatures.
Much attention in the market will be given to whether these vaccines stay on their stated schedules, and whether they see any hiccups in distribution.
Employment Challenges Ahead
How do we make sure that we don’t drive ourselves into financial ruin while waiting for the vaccine? Jobs.
Prior to the vaccine news, America’s economic recovery was exceeding forecasts and surpassing others in the industrialized world. In April, the IMF reported that GDP would shrink by 6% in 2020. It now projects a decline of 4%. The unemployment rate had reached a high point of 14.7% in April. In June the Federal Reserve had expected it to still be around 9% by the end of the year yet it went below that threshold only two months later. In October it stood at 6.9%.
If the path of the pandemic continues, by the end of the year there will still be 10 million fewer jobs than there would have been without the pandemic. Output will be some $700 billion, or 4%, lower than otherwise and we cannot expect personal income to reach pre-Covid levels until early 2022.
But growth will accelerate as doses of the vaccine are administered and people will feel more and more comfortable leaving their house as time goes on. Everything from theaters to public transportation will feel safer which will further revive the job market. It is estimated that before the pandemic over a fifth of workers were in jobs involving proximity to others. Those fears should abate as well.
Lastly, let us look at Consumer Confidence. This metric will be the output of all our efforts to get beyond this pandemic. The University of Michigan's consumer sentiment decreased to 77 in November from 81.8 in October and against market expectations of 82, a preliminary estimate showed. It is the lowest reading since August as consumers judged future economic prospects less favorably (71.3 vs 79.2 in October), while their assessments of current economic conditions remained largely unchanged (85.8 vs 85.9).
Meanwhile, inflation expectations for the upcoming year increased to 2.8% from 2.6% and the 5-year outlook to 2.6% from 2.4%. The outcome of the presidential election as well as the resurgence in COVID infections and deaths were responsible for the early November decline. Interviews conducted following the election recorded a substantial negative shift in Republicans’ expectations and no gain among Democrats.
A particularly important number to watch will be December’s UofM Consumer Confidence Index which will be released in the second week of December. This will indicate to us what the initial economic path in early 2021 may look like. Whatever direction it goes, market participants will be taking notice.