Weekly Market Update 02/08/2021
The economy is facing some challenges. Specifically, after last year’s stellar third quarter, in which GDP surged 33.4%, growth slowed to 4.0% in the final three months. Worse, given the high levels of weekly jobless claims, lesser gains in the leading economic indicators, a falloff in consumer spending, slowing growth in manufacturing activity, and cautionary words from the Federal Reserve on the outlook for the business recovery, there could be a further moderation in economic improvement in the current period.
The chief obstacle to a better economic showing is COVID-19. Not only are both the human toll (U.S. deaths are nearing 450,000) and the financial tab (lingering joblessness and widespread business closures) painfully high, but efforts to vaccinate Americans on a massive scale are still foundering. A new one-shot vaccine from Johnson & Johnson could gradually aid the struggling immunization program, but even assuming some success on that front, it may be months before this disease is brought under control. Indeed,
It could be well into the second half of 2021 before the economy is fully back on track. Meantime, there may be little GDP growth in the current period and just modestly more strength in the April- through-June term, with the latter outcome assuming the new COVID-19 variants do not severely restrict recent progress on the disease front. Importantly, we think Wall Street is only starting to grapple with the possible impact from these new strains.
Meanwhile, volatility is elevated in the financial markets. In part, what is unsettling investors are the new variants and the unknowns they present. Moreover, frenetic price swings in such highly speculative stocks as GameStop, AMC Entertainment, Virgin Galactic, BlackBerry, and Bed Bath & Beyond, along with soaring silver prices and wide swings in the VIX, or “fear index,” are unnerving investors. The high level of the stock market and the rich price-earnings ratios are adding to the concerns in some quarters.
Conclusion: There are issues in play that will cause investors to stand up and take notice. However, given the lack of suitable alternatives to equities, we think retaining a solid weighting in stocks of companies with a visible future path is a prudent way for long-term investors to proceed.