Stocks had their worst week since October last week, with the economic data showing the effects of renewed restrictions as the virus surge continues and as the effects of last spring’s massive CARES Act stimulus wanes.

However, we continue to expect further economic improvements in the coming months for several important reasons.

We expect the pandemic to fade in the coming months as the vaccine rollouts continue, despite the near-term operational challenges that will ultimately be overcome. We now have two vaccines approved in the U.S. and there is a high probability of one or two more approvals in the coming weeks. We expect the lack of vaccine supply and logistical challenges to quickly become non-issues in the coming months.

While we are seeing some near-term weakness in the economic data, we anticipate this will also be short-lived. While the impact of the massive $2.2 trillion CARES Act may be fading, it was just supplemented by a $900 billion follow-on package. This will provide additional support for the vaccine rollout and for businesses and consumers that have been negatively impacted by the pandemic. Biden just proposed an additional $1.9 trillion package that would provide even further support to the economy.

All of this fiscal support has kept the consumer healthy throughout the pandemic. Consumer spending surged in the third quarter as the hard lockdown of the second quarter was lifted and we expect another rebound as current restrictions are ultimately eased and the pandemic fades with the vaccine. Estimates show there is currently $2 trillion in excess consumer savings that will support significant pent-up demand as the pandemic fades. This excess savings was bolstered by the enhanced unemployment benefits and stimulus checks of the CARES Act and is set to be bolstered again by the follow-on stimulus plans.

In the near-term, we are seeing a clear impact from the COVID surge and renewed restrictions. Retail sales fell for the third consecutive month in December and now stand at 4.0% on a year-over-year basis, down from 5.1% in November. Jobless claims also reached the highest level since August. Consumers have retrenched amid a spike in COVID cases with more local restrictions on business and mobility impacting employment. We expect this softness to continue until the pandemic fades, but remain encouraged by underlying consumer resilience. In addition, recent labor market weakness has been concentrated in the hospitality sector with important economic sectors continuing to show job growth, including Technology, Health Care, Manufacturing and Housing.

Even with the recent economic weakness, the Atlanta Fed GDPNow model estimates fourth-quarter 2020 economic growth to come in at 7.4% after the third quarter’s massive 33% rebound. Meanwhile, the OECD Composite Leading Indicator reached its best level in nearly a year and was up for the eighth straight month. This suggests further economic growth ahead.

We are also encouraged by the massive global stimulus that is being applied to combat the effects of the pandemic. As of year-end, estimates show global monetary (central bank liquidity injections) and fiscal stimulus is up to 33% of global GDP (economic output). This is led by Japan’s 74% of GDP with the U.S. not far behind at 49% of GDP or $10.4 trillion ($4.2 trillion or 20% in fiscal stimulus). The U.S. estimate is before Biden’s proposed $1.9 trillion plan which would lift the U.S. to a total of almost 60% GDP.

China, which was first in and first out of the pandemic’s economic restrictions, remains a positive signpost. While they have applied “only” 18.4% of GDP in total stimulus, their just released data shows the economy actually expanded 2.3% in 2020. While this likely makes them the only major economy to hit a new GDP high in 2020, it is encouraging since they were first out of lockdown, applied a relatively low level of economic stimulus, and are the second-largest global economy. All of this has us remaining optimistic on stocks and cyclical sectors of the economy as we start 2021.

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