Weekly Investment Update (01/08/2021)
We hope that you were able to join Thursday’s A Fresh Look webinar, The Year in Review and What’s Ahead. If you were unable to join, a replay of the event will be available on Monday afternoon. We also published our Quarterly Investment Perspective this week, which includes views on key themes for 2021.
Georgia Senate Runoff Election Outcome Results in a 50-50 Senate Composition
Though both Georgia runoff races were tight, Democrat Jon Ossoff defeated incumbent GOP Senate David Perdue, and Democrat Raphael Warnock beat GOP Senator Kelly Loeffler by enough to avoid the losing side from requesting a recount of the votes in accordance with Georgia voting laws. The Democrats’ pickup of two more Senate seats brings their total to 50 plus the tiebreaker, Vice President-elect Kamala Harris.
Even though the Democrats also control the House and presidency, we believe their razor-thin margins in a country politically divided and the continuing economic crisis related to COVID-19 will hamper the Democrats’ ability to enact sweeping changes. President-elect Biden’s immediate focus is the continued economic recovery and COVID-19, including the nationwide vaccination program that began last month. We do expect income and corporate tax rates to go up, although actual increases may not match those spelled out in Joe Biden’s campaign. Further, a Democratic Senate increases the likelihood of another big stimulus bill passing soon, which could offset much of the fiscal drag on the economy from higher taxes.
Additional stimulus to further aid companies, individuals, and states and local governments is now more likely to be passed shortly after Biden takes office. Healthcare reform may also be addressed, though not in the near term, and we do not expect sweeping changes to policy. Additionally, several moderate Democratic Senators are expected to limit the chance for progressive agendas from being passed. What President Biden cannot do legislatively, he may seek to do with executive actions. We would expect President Biden and his leadership team to try to reverse President Trump’s deregulatory trend. Biden’s nominees for Cabinet, agency, and regulatory positions are now more likely to be approved with a Democratic Senate. Arguably, the most important post from a financial market perspective is the Treasury secretary, and former Fed Chair Janet Yellen is a highly credible candidate with bipartisan support.
Reopening Expected to Stall Before Recovering Alongside Vaccine Rollout This Spring
Our Bessemer Reopening Index (BRI) is a composite index of several high-frequency data sources that we have been tracking in order to monitor the economic reopening in real time. During 2021, we expect the BRI to continue its recent moderation in the early winter, potentially declining 5%-10% from the end of November through the end of January given accelerating COVID-19 case count and limited vaccine availability. However, activity should pick up from February onward as considerable vaccine supply reaches the population throughout the spring and summer.
Within the individual index components, we anticipate the industrial and manufacturing metrics (such as freight carloads and steel production) to maintain their recovered levels as the industrial economy has proven its ability to more effectively adapt operations to a COVID environment. However, we do expect many of the COVID-sensitive index components (like foot traffic or retail sales) to be negatively impacted amid elevated case counts in the coming weeks before rebounding this spring. This would reflect the strong inverse correlation we have observed between rising COVID cases and in-person credit card sales in COVID hotspots, for example.
The upcoming spring’s vaccine-driven recovery in the COVID-sensitive areas of the economy should also help drive an improving employment backdrop as retail and recreation sectors have experienced severe job losses. This should boost the index’s employment metrics, such as unemployment claims and hours worked. Please see January’s Quarterly Investment Perspective for more details on the Bessemer Reopening Index.
Contraction in Leisure and Hospitality Employment Dragged on Nonfarm Payrolls in December as COVID-19 Cases Increased Across the Country
Nonfarm payrolls declined by 140K in December, and nonfarm employment is down by 9.8 million, or 6.5% from its February levels. The majority of employment contraction during the month of December occurred in the leisure and hospitality industry, which fell by 498K. This industry has been the hardest hit since the pandemic began, as evident by December’s employment level being 23% lower than February’s level.
The December jobs report highlights the fragility of the current economic environment and bifurcation of the economy, with some industries being largely unaffected by COVID-19 restrictions and others being very adversely impacted. We believe that the labor market will continue to recover, albeit slowly, and we are unlikely to see it fully recover for at least another year. Additionally, the national vaccination campaign is going to play a pivotal role in allowing industries such as leisure and hospitality to recover, and we forecast that we should be close to achieving herd immunity by the summer season. That said, we may see shifts in consumer behavior in the long run. For example, more people may continue to cook and work remotely at least part of the workweek, which have economic effects.
Portfolios Trim COVID Beneficiaries, Add Investments in Reopening Beneficiaries
Bessemer equity portfolio managers have trimmed several holdings that benefitted from the COVID-19 environment in order to fund positions leveraged to a gradual reopening of the economy. A portion of the COVID beneficiary proceeds is likely to move into consumer discretionary businesses that benefit from increased stimulus and spending. Another area likely to see increased investment is healthcare, specifically biologics manufacturing businesses. As a wave of new drugs progresses through phase one and two trials, drug producers are likely to benefit. As discussed in our biweekly Investment Policy and Strategy Committee (IPSC) meeting, portfolio managers and analyst teams continue to evaluate structural trends with strong staying power, such as electric vehicles, payments, and semiconductor manufacturing.
Banks and High-Growth Stocks Can Rally Simultaneously
As we saw during Thursday’s session, an improving growth outlook can lift all boats. Amid higher U.S. Treasury yields, high-growth names rallied impressively. Conventional thinking and correlations suggest that high-growth names are susceptible to Treasury yields moving higher. However, correlations over long periods fail to capture nuances, such as when yields move higher for the right reasons (i.e., improving growth expectations). With inflation expectations increasing gradually, the Fed expected to be on hold for a long time, and growth forecasts tilted to the upside, both cyclical and structural trends can benefit within equity portfolios.
U.S. / China Relations: Bilateral Pressure Increases Ahead of Presidential Transition
The waning weeks of the Trump presidency have seen a bilateral pressure increase toward Chinese companies. Recently, the State Department and Department of Defense officials have held conversations on expanding a blacklist of companies prohibited to U.S. investors because of claimed ties to China’s military and security services. Recall that the U.S. government announced its original blacklist in November with 31 companies.
In our view, while President-elect Biden is not necessarily looking to go easy on China — recall this issue possesses bipartisan agreement — he is likely to approach China relations in a multilateral manner when he takes office by drawing allies into the conversation. This suggests that some of the recent executive actions or comments regarding China may be reversed, but the details and timing are uncertain during this complicated transition process.
As we discuss in our latest Quarterly Investment Perspective, we are comfortable with our U.S. overweight and will only be adding to emerging markets selectively through active management in light of many differences between countries and companies in this fluid environment.
— Bessemer Investment Team
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