Weekly Investment Update (01/15/2021)
Industrial Economy Recovery Holding up Well Despite Recent COVID Wave
High-frequency data indicate the manufacturing recovery sustained through the most recent COVID wave. While renewed restrictions are holding back parts of the services sector, the manufacturing side of the economy remains relatively unaffected. Raw steel production gained steadily through the fall and has experienced a notable uptick to start the year, rising 7% over the past two weeks. While steel output is still 10%-15% lower than pre-COVID, we are encouraged by the solid growth seen in recent weeks and months. Additionally, Class 8 (heavy-duty) truck orders were incredibly strong in December; preliminary numbers indicated December orders were 50,900 units, which would be the fourth-highest reading in history.
Rail volumes for the first week of the year appear quite strong, continuing the trend seen in October and November. Notably, commodity rail volume is improving off the May 2020 lows; volume is now nearly positive on a year-over-year basis. As the vaccine distribution continues to progress, we expect these positive industrial trends to continue in the coming weeks and months.
Fed Signals on Monetary Policy Remain Extremely Accommodative
There have been a number of sell-side reports suggesting that the Fed could taper its asset purchases in the near term given improvement seen in the economy. These reports have led investors to push bond yields higher and incited large outflows from bond-related ETFs. In our view, the Fed is nowhere near tapering bond purchases and nowhere close to removing any type of accommodation. After all, the U.S. economy is 84% service-based as a percentage of GDP and has a long way to go in order to return to normal.
A number of Fed members spoke over the past week and emphasized that bond purchases will remain appropriate for “quite some time.” Fed Governor Lael Brainard noted, “The economy is far away from our goals in terms of both employment and inflation, and even under an optimistic outlook, it will take time to achieve substantial further progress.” We note that the Fed’s goals appear to remain somewhat open-ended on purpose, which prevents the committee from committing to remove accommodation should macroeconomic data improve.
We continue to see a Fed that will be extremely patient with this economic recovery. Given both monetary and fiscal policy mistakes made following previous recessions, there is a low likelihood of the Fed removing accommodation too soon. As a result, we see continued upside potential for risk assets.
President-Elect Biden Unveils $1.9 Trillion Stimulus Package
On Thursday, President-elect Biden released the details of his stimulus package, the American Rescue Plan, which totals about $1.9 trillion in value. The largest ticket items include $1,400 stimulus checks (totaling about $450 billion), $350 billion in flexible state and local aid, and $300 billion in extension of unemployment benefits. Some smaller line items include aid to small businesses, school reopening, and funding for COVID testing and vaccine distribution. A provision to increase the minimum wage to $15 per hour is also in the bill. Congress is set to begin negotiations on the bill.
In the coming weeks, we expect Congress to amend Biden’s American Rescue Plan in an attempt to pass the bill with bipartisan support. This means that we will likely not see items like an increase in the minimum wage included in the final bill or significant aid to state and local governments, and we expect the final bill to decrease in dollar-value size. Stimulus checks, extension of unemployment insurance benefits, funding for testing and vaccine distribution and school reopenings and aid to small businesses should generate support from both Democrats and Republicans and be included in the final bill.
COVID-19 Variants Spook Governments, but Should Not Evade the Existing Vaccines
A third variant of the COVID-19 virus has been identified with links to Brazil. Similar to the U.K. and South African variants, the Brazilian variant appears to be more contagious than the variants circulating through the U.S. and most other parts of the world. As a result, some governments banned travel to the U.K., Brazil, and South Africa.
Since the COVID-19 vaccines rely on the “original” COVID-19 virus, there are many questions on the effectiveness of the existing vaccines on the new variants. Current research suggests that all existing variants of the virus are similar enough such that current vaccines should be equally effective on all of them. All of the top vaccine producers and partnerships are working to conduct their own tests in order to further quantify this issue.
In a worst-case scenario where scientists determine that a new vaccine is necessary, existing vaccines should be able to meet this need relatively quickly. Specifically, one of the main benefits of Moderna and Pfizer’s mRNA-based vaccines is how adaptable they are. Both companies have stated that they can quickly develop a new vaccine for a variant of the virus. Additionally, the process for a new variation of an already approved vaccine type is much faster than a brand new one (consider the flu vaccine manufactured for new variants every year as an example).
— Bessemer Investment Team
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