A New Year and a Hopeful Outlook

Jan 08, 2021 | Nick Scholte


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Economic recovery should continue and accelerate through 2021, but the new Covid-19 variants bear careful attention as potential disruptors. Meanwhile, good riddance Mr. Trump.

To my clients:

It was an up week for North American stock markets with the Canadian TSX up 3.5%; the U.S. Dow Jones Index up 1.6%; and the U.S. S&P 500 up 1.8%.

Happy New Year to my clients! After a holiday break, there is much to talk about...

First, in addition to being the first week of a new year, it is, of course, the first week of a new month also. With it, the three big economic releases that I invariably track – the ISM Manufacturing and Non-Manufacturing (i.e. Services) Indices and the monthly U.S. Employment Report. Both ISM indices were very strong – handily beating BOTH expectations and the prior month’s reading. Meanwhile, the employment report disappointed with the first loss of jobs reported since May of last year. While a monthly loss of jobs would normally be a very concerning signal, I’m of the view that it should be discounted this time around. The surge in U.S. covid cases and tightening social restrictions are an obvious culprit in the poor reading, and may also lead to disappointing employment reports in the next handful of months also. But, at the same time, vaccine rollouts are well underway and should accelerate as distribution procedures get refined and as more vaccines become available (Johnson & Johnson and Astrazeneca may soon seek approval for their vaccine candidates).

I’d be remiss if I didn’t note a troubling development on the Covid-19 front – the emergence of new strains of the virus in the U.K and South Africa that are now beginning to spread globally. Initial accounts suggest that while these new strains are much more easily spread, they are not – thankfully – any more lethal or damaging than the first covid strain identified about one year ago. At this stage, while more easily spread covid strains are indeed troubling, the real concern would be if these strains were resistant to the current vaccines in the initial stages of rollout. I’m obviously not an expert in this area, but my readings suggest that researchers – so far – believe this will not be the case and that the current vaccines will work equally well against these new strains. This is a situation that must be monitored closely for it could be a game changer to the economic recovery if the expectation for vaccine effectiveness is proven wrong.

Obviously, this week was notable for another reason – the chaos and lawlessness in Washington, DC and the assault on the Capitol Building. I must admit that it was jarring to watch those scenes unfold while stock markets maintained strength. I’ll further admit that it was tempting to consider selling equities in the face of these scenes and imagine the worst. But frankly, unless one believed that all-out civil war was imminent, or that the Washington lawlessness would be repeated in state capitols across the U.S. and that the social fabric of the nation would rapidly unwind, giving into such temptations would not be prudent portfolio management. It was a sickening display to be sure, but one likely destined to peter out in the moment. Markets are forward looking, and typically lead the economy by about nine months. The likely path for the economy over the next nine months (and years beyond) is continued recovery and, perhaps, even outright strength. Low interest rates enabled by an ultra-accommodative U.S. Federal Reserve are fueling this recovery. Hence the dichotomous strength exhibited by the markets while chaos reigned in Washington, DC.

Last point about Wednesday: these events are likely to define the Trump presidency. While there were several economic policies of his which I defended, and which perhaps could only have been initiated by such a man, I also think the seeds of discord planted by Trump are far more damaging over the very long-term. In my opinion, his style of leadership lowered the stature of the U.S. in the eyes of the world, and it will take a concerted and sustained effort for the country to regain its standing. I look forward to the return of civility promised by the incoming administration.

Finally, more equity was added to portfolios this week as I push portfolios into a modestly overweight position. I’d expect to incrementally continue this process over the coming weeks and months unless the aforementioned new Covid-19 strains prove more problematic than at present. As I said, that is a situation that must be watched closely.

That’s it for this week. Stay safe and all the best,

Nick

Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

Scholte Wealth Management
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