The economic concept of “no free lunch” revolves around the idea that there are often limits when making proper decisions. In the healthcare space, we could say 2020 was a no-free-lunch year with COVID-19: if the virus is not controlled, economic activity that surprises to the upside will be followed by unacceptable (non-linear) virus spread, meaning consequent data must surprise to the downside (lockdowns take place). Europe has lived this experience during the last month. The U.S. payroll data last week also make this point: with roughly -10 million jobs still missing vs. the peak, employment rose just +245,000 m/m with weakness in retail jobs (could be seasonal) and government (Census swing). The unemployment rate declined to 6.7% though the labor force participation rate fell -0.2% points to 61.5%. Household employment actually fell slightly m/m in this report, and lockdowns are still ahead of us (as this data reflects the economy in mid-November).
A central principle for health officials + economists + politicians looks to be to keep the virus spread linear vs. non-linear since non-linear spread can quickly overwhelm hospital facilities & staff. “[NY Governor] Cuomo said New York's statewide daily positivity rate rose above 5.4 percent on Friday but added that number isn't ‘relevant anymore.’ He clarified, ‘We're really focusing on the hospitalization rate and hospital capacity’” (4NY). That’s the goal until vaccine(s) are distributed.
Even with Europe in an economic double-dip, China (virus controlled) continues to expand (commodities like copper signal this). Global mfg is still working (goods > services). Recent academic research (eg, Stock 2020) indicates that Smart Lockdown 2.0 should be less economically impactful than Global Lockdown 1.0. But there remains a large gap for those who cannot work remotely or tap into what is working in the global economy.
Yet we know the “fix” that has worked in 2020: low rates + more fiscal stimulus.
Bottom line: we’re looking for a bridge now. In 2021, the story remains one of pent-up demand. Most of the U.S. job loss has been in the lower-income cohorts, but most of the spending cuts have been in the upper-income cohorts (tracktherecovery.org). The upper-income portion indicates pent-up demand (which is the same story as the saving rate still being elevated). The top 20% of income earners do 40% of the spending, and the recession is mostly over for wealthier individuals.
Elsewhere there are impaired industries (airlines, rail, etc) and 3 key vulnerabilities: 1) individuals have shifted to emergency unemployment benefits, which are at risk of expiring (should not be that hard to patch); 2) state & local governments are still seeking aid from Washington (for vaccine distribution & healthcare, in addition to other expenses .. but this is harder to patch); 3) small businesses are making decisions on whether to close or to continue to give it a go for a few more months (may or may not be fixable, but speed is key). The macroeconomy can still look past some of these items (ie, if a restaurant closes, another can take its place). But with the costs of the pandemic falling on those least able to bear it, calls for overdue stimulus will continue to mount. As we noted last week, forward-looking risk assets have been rallying on hope for stimulus + a vaccine in 2021. That’s getting priced in.
To sum up: the end is in sight, but the economy still needs a bridge. This should be the story that develops in the next several weeks in D.C. The U.S. has lockdowns now (CA, etc), but stimulus talks are moving again & last week’s data should speed that process along.
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by FactSet.
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