The events of the past week took some wind out of the sails as attention returned once more to politics. However, with the inauguration shortly upon us and earnings season about to begin, I expect the media will return to the pandemic and economy sooner rather than later. We anticipate the fourth quarter was good to many companies but expectations are high and in truth, a lot of the good news is currently priced in at these levels. We anticipate the usual choppiness around earnings season, with companies moving higher on earnings surprises while others moving lower on profit taking. More importantly, we look forward to once again receiving some guidance from CEO’s on what the rest of the year could look like from their perspectives.
Perhaps the biggest news this week was President-elect Biden’s proposed stimulus package. While it does not come as a surprise, coming in at almost $2 trillion, we are encouraged that the economy, and by extension the stock market, has more room to run. The package, if passed, includes $1,400-per-person direct payments to most households, a $400-per-week unemployment insurance supplement through September, as well as funding for COVID-testing, vaccine distribution, and state and local governments aid.
One sector that has underperformed for some time, and for good reason, is the energy sector which was down almost 33% last year. I say for good reason, because the pandemic shut down all travel, including to and from work since many people worked from home. Cruise ships were docked and airlines watched as their planes sat idly on the tarmac. However, this year optimism for a recovery has pushed oil prices higher which translates into a 17% return for the energy sector so far, this year. It still has a way to go to make a full recovery, and a lot is contingent on getting the pandemic under control, but clearly money has begun rotating out of the more defensive sectors, such as communication services, real estate, and utilities into other areas of the economy which could see significant gains this year.
Among the many topics being discussed is the possible resurgence of inflation. Inflation has been running very low for some time now even with interest rates hovering around zero. However, with additional stimulus and pent-up consumer demand, 2021 could be the year inflation returns. However, the Federal Reserve has made it very clear that it has no intention of raising rates anytime soon. While its mandate calls for 2% inflation, many of the Fed governors are on record saying inflation could run hot for quite some time, meant to suggest years not months. This week Fed Vice Chair Richard Clarida said that under the central bank’s new framework, it won’t raise rates until inflation has reached its target of 2% for a whole year. Chairman, Jerome Powell, took it one step further saying, it won’t raise rates unless it sees “troubling inflation.”
However, not is all rosy despite my optimism for the coming year. The CEO of Moderna said this week, the world may have to live with COVID forever. He believes the virus is likely to become an endemic disease, meaning it will always be present in the population, but circulating at lower rates. While he believes the current vaccines will provide immunity for up to one year, that new mutations of the virus could necessitate new formulations and that ongoing annual booster shots may become a fact of life. Also, a bit concerning is a new alliance between Microsoft, Oracle, and Salesforce who are working together to create a COVID-19 vaccination passport. This credential could be used by businesses, airlines, and countries to check if people have received a coronavirus vaccine to “demonstrate their health status to safely return to travel, work, school, and life while protecting data privacy.” Sweeping moves after 9/11 have demonstrated how initiatives that are built with the best intentions can be, and often are, taken too far.
In closing, I turn to the inauguration and a bit of trivia I learned this week that I hope you’ll find as fascinating as I did. The word inauguration can be traced back to the early Roman Republic (510 BC – 27 BC). In the early Roman Republic, all major decisions, such as when to go to war, and who to appoint to positions of power were decided upon by augurs. In Rome, an augur was considered a divine soothsayer who could interpret the will of the gods by observing the flight patterns of birds. The Latin noun "inauguratio" was derived from the verb "inaugurare" (to take omens from birds in flight). In Spanish "inauguracion" means an unveiling or opening and the verb augurar means to predict. A "mal aguero" is a “bad omen.” In English, we sometimes say, “it doesn’t (or does) augur well.” We hope, for the sake of the country, that this inauguration augurs well. Now you know.
Bruce J. Mason, MBA