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January 29, 2021

Review the latest Weekly Headings by CIO Larry Adam.

Key Takeaways

• Congress to put the “rescue” stimulus ‘pieces together’
• Second wave vaccines may ‘connect’ us all sooner
• 2021 earnings rebound to complete the ‘picture’

Today is National Puzzle Day! Whether it be a crossword, a jigsaw, or a word search, puzzles test our memory, concentration, cognitive function, and problem solving skills. During the height of the COVID-19 induced lockdowns, puzzles also served as a source of entertainment and a welcomed distraction from the events of the world. In fact, in the early months of the outbreak puzzle makers reported that sales jumped over 300% from the year prior, and some were unable to keep up with the demand*. As your Investment Strategy Team, we are always trying to ‘put the pieces together’ to form a clear economic and financial market ‘picture,’ and with valuations at the highest level since 2000 (LTM P/E 27.1x), investors may feel ‘puzzled’ about how to navigate the equity market in the months ahead. Ultimately, focusing on the state of the economic recovery, vaccine dissemination, and corporate earnings provides the key ‘pieces’ needed to move the market higher.

• Stimulus May Put Recovery In The Right Spot | President Biden has put forth his proposal for an initial $1.9 trillion “rescue” stimulus package with plans for a second “recovery” deal in the future. Enhanced stimulus checks, boosted unemployment aid, child care and child tax credits, rental assistance, subsidies for health insurance premiums, aid for states and schools, testing funding, and a $15 minimum wage are among the most notable components of his proposal. Given the lack of consensus and the slim majority held by the Democratic Party, our Washington Policy Analyst, Ed Mills**, believes the negotiations will yield a compromise “rescue” bill of ~$1 trillion that will be passed in mid-March to accommodate the expiration of previously enhanced unemployment benefits on March 14. However, he believes alternative outcomes faced by Democratic leadership revolve around ‘acting fast’ versus ‘ acting big.’ Acting fast could be passed earlier (although a smaller package) as there appears to be bipartisan support for vaccine funding, stimulus checks, and school funding. Acting big could delay passage (and probably be done by reconciliation) but would likely include such things as additional state and local government aid and paid sick leave. With 4Q20 GDP (4.0%) falling below consensus estimates, near-term weakness in the economy could initiate more urgency for passage which is why next week’s manufacturing and employment data will be closely watched.
• Single Dose Vaccine May Help Us All Connect Sooner | As the Fed reiterated this week, the economic recovery is dependent upon not only the course of the virus but also the vaccination progress. One silver lining is that some of the data trends, such as new cases and hospitalizations, appear to have peaked and are steadily improving. However, for a full return to normality, vaccinations for the majority of the population need to occur swiftly. From an accessibility and flexibility perspective, there are a few reasons for optimism. First, President Biden’s original pledge of 100 doses in his first 100 days has been increased to 150 million as production and distribution capabilities expand. Purchasing 100 million doses of each of the high-efficacy Pfizer and Moderna vaccines is a positive. Second, more experience should allow state administrators to improve communications and streamline the distribution process of the vaccine at the local level to maximize daily inoculations. Third, while additional vaccines such as AstraZeneca and Johnson & Johnson have a lower efficacy rate than Modern and Pfizer, they will provide further accessibility (assuming emergency use authorization (EUA) is granted by the FDA) for people to receive some level of protection and hopefully avoid hospitalization. Our base case has included a second wave of vaccines, and while the efficacy rates vary, we expected that the immunization timeline could be accelerated by several months (potentially shifting from the fall to the summer). The bottom line is that more effective distribution and additional second wave vaccine options keep our expectation of a return to normality for the US economy (and likely the rest of the world) around midyear. The biggest unknown and threat to this timeline remains the potential deterioration in vaccine effectiveness against the new mutations of the virus.
• Broad-Based Earnings Rebound The Missing Piece | For the S&P 500, 4Q20 earnings season has far exceeded expectations, with earnings beating their estimates by 13.5% since earnings season started two weeks ago. This momentum cannot be understated as it gives more confidence that there is potential upside risk to our already above-consensus 2021 and 2022 S&P 500 earnings forecasts of $175 and $200, respectively. With price-to-earnings (P/E) multiples unlikely to increase further after two consecutive years of expansion, strong earnings are necessary to move the equity market higher to our year-end target of 4,025. After four straight quarters of negative earnings growth, resulting in 2020 S&P 500 earnings declining by ~15%, earnings should significantly rebound in 2021, up ~27.5%. More importantly, earnings growth is likely to be broad-based with ten of the eleven sectors producing positive growth (versus four in 2020). Ultimately, a sustainable economic reopening is needed, especially for cyclical sectors like Industrials, Consumer Discretionary, and Financials, to allow for this expected broad-based earnings rebound.

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Video recorded November 13, 2020. All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Past performance may not be indicative of future results.