Reasons for thanks, with a long road ahead
November has given us much to be thankful for. Though the exponential growth of positive coronavirus cases continues to weigh, news from Pfizer, Moderna and AstraZeneca may finally be showing us the light at the end of the tunnel. While stocks had shown strength on the hope of this news, November brought more concrete signs that economic growth may follow a successful vaccine.
A trio of Mondays in the middle of the month brought results from three different pharmaceutical companies showing we are one step closer to a safe and effective vaccine to target the virus causing COVID-19. While regulatory approval, distribution and hurdles to vaccine acceptance remain, the news was well received.
Of course, stock investors had been looking ahead to 2021 earnings since the initial rounds of stimulus calmed fears about the depth of a recession. On the other hand, bond yields—a more useful proxy for economic expectations—had remained depressed, even amid general optimism this summer. With bond prices trading inversely to yield, investors had enjoyed the double dip of strong returns on both their stock and bond investments.
Perhaps unsurprisingly, the yield on the 10-year Treasury shot up on Pfizer’s vaccine announcement, the first of the three successful late-stage vaccines to announce efficacy data. Rising bond yields, especially when comparing longer-term to short-term bonds, signal investor confidence that economic growth is likely to reaccelerate. Those investors demand a higher yield, as alternatives to Treasurys look more attractive with the prospect for economic growth.
To be fair, bond yields remain well below where they began the year, but a long road waits ahead.
To wit, economists at JPMorgan have suggested the recession may well persist into the first quarter of 2021, in light of the continued impact of the pandemic. So, rather than a sign that all is well, November may have been confirmation that we’re on the right path.
The vaccine news is welcome, but it wasn’t the only uncertainty entering the month. Stocks continued their march higher in November, with the Dow Jones Industrial Average crossing 30,000 for the first time, despite persistent questioning of the election, a sign that investors may very well think beyond party lines.
Stocks can move higher, for a time, void of real signs of progress on the economic front. But, with some confirmation from the bond market, I’m increasingly optimistic about what 2021 will bring.
The challenge remains bridging the divide between the optimism of 2021 and the urgency of the pandemic as it stands today. This includes a need for Congress to reach a spending deal by December 11, a meaningful conversation about the costs and benefits of additional coronavirus stimulus measures, as well as continued guidance on mitigating the spread of the virus.
Uncertainties remain. But investing across 2020 has taught us that uncertainties don’t have to derail our investments. Balance, both in terms of asset allocation and investing temperament, has proven successful. And, even as we look toward resolution of some of the uncertainties, balance will help insulate us from whatever else may emerge.
Kyle Tetting is director of research and an investment advisor at Landaas & Company.
(initially posted November 27, 2020)
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