Stocks finished 2020 on a positive note, looking past the continued spread of the virus and instead focusing on the positive news about vaccine development and distribution and the unprecedented monetary and fiscal stimulus.

We are encouraged by the broad participation in the risk asset rally, led by small-cap stocks, with the Russell 2000 Index up 20% for the year. The large-cap S&P 500 Index rose a solid 18.4% on the year. Even international developed- and emerging-market stocks rallied into the end of the year with developed markets ex-U.S. up 8.3% and emerging markets up 18.7% in U.S. dollar terms.

This positive global stock market performance is consistent with many other indicators we follow that suggest a sustainable economic expansion will continue unfolding as we move into 2021. A major support for this recovery is the massive unprecedented government stimulus that is being applied to combat the pandemic.

Estimates now show the U.S. is up to $10.4 trillion or 48.5% of GDP (economic output) in combined monetary (potential Federal Reserve liquidity injections of $6.2 trillion or 29% of GDP) and fiscal (potential fiscal stimulus of $4.2 trillion or 19.6% of GDP) stimulus to fight the impact of COVID-19. The Eurozone, Japan, U.K., China and others have provided similar measures for a global total of central bank liquidity injections and fiscal stimulus of about 33% of global GDP.

We are encouraged by the recently passed $900 billion follow-on stimulus package that paves the way for millions of Americans and small businesses to get economic relief as the pandemic continues to present a major headwind for certain sectors of the economy. The massive fiscal relief should go a long way toward minimizing permanent economic scarring while the vaccines are rolled out in the first half of 2021.

We now have two vaccines approved and we anticipate more will be approved in the coming months. These vaccines should allow for a full reopening of the economy in 2021 and we have seen a rotation into stocks that benefit most from reopening coincide with the positive vaccine news.

Despite the near-term virus headwinds, there are many other reasons for our positive outlook heading into 2021. The consumer was very healthy heading into the pandemic and the fiscal support is providing a strong bridge for those most impacted by the pandemic. Consumer surveys show consumers remain optimistic about the future while significant pent-up demand is building as a result of the restrictions put in place to combat the virus.

With the extremely aggressive monetary policy pursued by the Federal Reserve, consumer and business borrowing rates are at historically low levels. This has been a major support for the booming housing market, which has been a major driver of economic activity. It has also supported very healthy corporate balance sheets that are flush with cash. Corporate profits are showing significant improvement since the second-quarter lockdown lows while executives are optimistic for the future. We expect corporate capital spending and hiring will improve as the pandemic and political uncertainty fade.

Consequently, we remain favorable on risk assets as we begin 2021, especially the Consumer Discretionary, Industrial and Material sectors that are all beneficiaries of a return to normal economic activity as the global economy fully reopens.

While we get important economic readings this week, including the December global business surveys and Friday’s labor market report, the major development is Tuesday’s Georgia Senate run-off races. Georgia is holding a special election for both of its Senate seats and majority control of the Senate hangs in the balance. Democrats need to win both races to get to 50 Senate seats where the Vice President can then provide tie-breaking votes. This control of the Senate is critical for implementing much of the Democratic platform. We will provide a special note analyzing the results once they are in.

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