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COVID’s Economic Impact – Version 2.0

| November 17, 2020
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The resurgence of COVID-19 cases across the country has given new light to the potential for further economic turbulence heading into 2021. The wounds of the recent bear market remain relatively fresh and many Americans continue to struggle with employment opportunities as the recovery in the labor market remains a work in progress. Current estimates indicate a peak in new virus cases in the first week of December (following Thanksgiving), which means the likelihood of heightened media coverage of COVID-19 remains probable through the end of the year. If such estimates do materialize, the state of the public health sector will undoubtedly produce uncertainty along with a potential strain on the capacity of hospitals and healthcare workers. From an economic and equity market standpoint, however, it is more difficult to gauge the potential outcome because the current environment remains differentiated relative to when we first encountered COVIDConventional wisdom may suggest a drop in equity markets due to renewed lockdown measures, but we strongly want to urge caution against such a mentality. The advances in vaccines over the past six months have generated a tremendous lift in consumer and market sentiment. If we witness peak COVID cases, along with positive vaccine news, we will not be surprised if market activity reflects only the positive news. This may mean added global equity market gains across the board and not just in the U.S. technology sector. Such a relationship has been evident over the past few weeks as the S&P 500 Value Index has outpaced the S&P 500 Growth Index by nearly 3%. And it has occurred amidst soaring virus cases. This becomes critical to understand because it may indicate the early stages of a shifting catalyst that may eliminate one of the largest dislocations in U.S. equity market history. This means that vaccine sentiment should not be overlooked as a catalyst for equity market gains, despite the eventual outcome in the U.S. Presidential Election and despite the outcome in COVID cases through the end of the month.  

Additional positive catalysts that remain relevant include domestic and global stimulus measures as well as a healthy consumer backdrop. We have all been immersed in the domestic political roller coaster tied to the next wave of potential fiscal stimulus, which both Democrats and Republicans have expressed a desire to achieve. But for those of you following developments outside of the U.S., however, the commitments from central banks, as well as the International Monetary Fund (IMF), remain indicative of efforts to maintain a capitalized global banking system as well as functioning trade relations. The reason this is so important is because the international community failed to quickly implement such decisive measures in the early part of the Global Financial Crisis in 2008 and, as a result, lagged the U.S. in economic growth for half a decade. It appears that it was a lesson well learned and we believe ex-U.S. fiscal stimulus may provide a strong basis for international portfolio diversification in 2021.  

On the topic of consumers, I want to stress the fact that many Americans have not yet recouped the benefits of a recovering labor market. Jobless claims remain elevated and permanent job losses continue to be announced. What is interesting amid the labor market data, however, is that the vast majority of Americans (and their employers) have generated a work-from-home economy that has boosted aggregate savings accounts to the highest level on record. It has also maintained, and elevated, consumer retail sentiment in away that makes the recent recession seem entirely irrelevant. Basic economic principles equate higher savings to an eventual upward shift in investment and/or spending, which translates perfectly [to us] as an immediate catalyst to economic and market growth. Consequently, it is difficult for us to build a case against consumers and against global equity markets over the next 12 months. Our belief is grounded in the potential for consumer spending capabilities, global fiscal stimulus, and overall sentiment tied to a COVID vaccine. As a vaccine is distributed to the public (hopefully at some point soon), it may set the stage for a long-term secular growth cycle.  

 

Edison Byzyka, CFA – Chief Investment Officer – Credent Wealth Management 

11/13/2020 Commentary 

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Investment advice offered through CX Institutional, a registered investment advisor. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.  

All return data sourced from Bloomberg.   

All other data soured from Bloomberg, through the release of monthly figures from the Department of Labor, Bureau of Economic/Labor Statistics, U.S. Census Bureau, or from the Federal Reserve and any of its affiliated regional locations.   

Small Business Optimism sourced through NFIB.  Small business hiring plans sourced through NFIB. Consumer sentiment sourced through the University of Michigan.   

Earnings data sourced through Bloomberg Intelligence and through Bloomberg’ earnings analysis composites.  Interest rate cut/rise probabilities are sourced from Bloomberg’s tracking of futures contracts tied to the Federal Funds interest rate. 

Manufacturing data – Markit PMI – Bloomberg 

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changed in the aggregate market value of 500 stocks representing all major industries.  

The S&P 500 Value Index measures the performance of the large-capitalization value sector in the US equity market. It is a subset of the S&P 500 Index and consists of those stocks in the S&P 500 Index exhibiting the strongest value characteristics. 

The S&P 500 Growth Index measures the performance of the large-capitalization growth sector in the US equity market. It is a subset of the S&P 500 Index and consists of those stocks in the S&P 500 Index exhibiting the strongest growth characteristics. 

The International Monetary Fund (IMF) is an organization of 190 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. 

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