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Investors are trying to position for the pending recovery while also navigating the current risks that are still present.


Last week, Pfizer announced some promising news regarding their COVID-19 vaccine trial (as did Moderna this week).  Some of the hardest hit areas like travel, leisure, entertainment, energy, and restaurants were up 20-40% based on the news.  Many of them later gave back some of that rally during the rest of the week as the reality of the current situation and the timeline for when the vaccine will be widely available came back into focus.

Source: Koyfin.

Source: Koyfin.

Source: Koyfin.

Source: Koyfin.

Source: Koyfin.

Source: Koyfin.

Looking at gross domestic product (GDP), Consumer Price Index (CPI), and earnings growth for 2020, one can start to interpret the market reaction in recent weeks as trying to price in the timing of the recovery that is coming in 2021. 

Source: FRED.

Source: FRED.

If nothing else, this will be driven by the extreme weakness in comparisons and the low probability of another sustained national/global economic shutdown.  This should lead to a rally in growth and inflation sensitive assets and an underperformance in defensive assets. 

In the U.S., cyclical sectors like Industrials, Materials, and Financials along with small caps and high beta have started to perform better while areas that have benefited from reduced mobility have been underperforming. 

Source: Koyfin.

U.S. Treasury yields have been increasing, while high yield credit spreads have been decreasing.  This is another sign that investors are preparing for better growth, inflation, and earnings outcomes.

Source: Koyfin.

Source: Koyfin.

At the same time, COVID cases and hospitalizations are at record levels, which has prompted some areas in the U.S. to start limiting mobility and putting restriction in place on certain businesses.  If this continues, it could lead to a reduction in the outlook for GDP, inflation, and earnings growth and delay timing of the expected recovery.


Source: COVID Tracking Project.

The path of the virus and the response by governments in the U.S. is likely the biggest near-term domestic risk to the timing of the recovery and whether the recent trends continue (cyclicals are leading while stay at home is lagging). 

Another area to monitor outside of the U.S. that could delay the recovery is Europe.  We have mentioned in prior posts that their economies are heavily service-oriented and many governments there have already begun to limit mobility and restrict certain activity.  The weakness in Europe could eventually impact the U.S. economy, with the most direct way being a higher U.S. dollar exchange value. 

There will likely be a high amount of volatility as investors try to determine when the recovery period will take hold as growth and inflation sensitive assets begin to enter a sustained period of outperformance to regain their prior loses. 

 

Rank Dawson, CFA
Vice President, Research and Strategy

Boyd Watterson Asset Management, LLC

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.