Morgan Stanley
  • Wealth Management
  • Nov 23, 2020

Yes, There’s Light at the End of the Tunnel

Worsening COVID-19 conditions may weigh on U.S. market sentiment, but investors should focus on encouraging signs, including positive news on vaccines.

Given the grim recent trajectory of COVID-19, the prospect of more lockdowns and political dysfunction that could delay additional federal stimulus relief until the New Year, it’s not surprising that investor sentiment seems to have taken a turn for the worse. Although the S&P 500 remains up 12% year to date, touching a new high earlier this month, it now looks set to limp along into the end of the year. 

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Still, we don’t think a temporary market slowdown will derail the U.S. economic recovery. In the next few months, we see the outlook increasingly dominated by much more positive catalysts. Here are three signs of light at the end of the 2020 tunnel:

  • COVID-19 Vaccines: At least three different research trials have produced better-than-expected results. The three treatments closest to distribution have all indicated near 95% efficacy. The first up could be made available to high-risk groups and front-line workers as early as December, and the global economy could be benefitting from a broad roll-out of vaccines by the second quarter of next year. If by the late summer, we see near universal availability of vaccines, that could suggest an end to the pandemic by the third quarter.
  • Pent-Up Consumer Demand: The concept of pent-up demand isn’t just wishful thinking. We believe extraordinary demand has built up that could provide upside to our 2021 U.S. real GDP forecast of 5.9%. Despite continuing high unemployment, many households have shored up savings, if for no other reason than the inability to spend on entertainment and travel, including commuting costs. Less spending combined with lower interest rates may also mean lower debt payments. These savings set up a meaningful, and still underappreciated, tailwind for growth in the second half of next year. Rising home valuations and robust capital markets are also contributing to healthy consumer balance sheets.
  • Rising Small-Cap Stocks: The 20-year high in small-cap earnings revisions offers further evidence that the economic recovery has gathered momentum under the surface. Such revisions have historically been a precursor of an economic rebound. With 91% of stocks in the Russell 2000 Index, a broad benchmark of small-cap companies, now running ahead of their 50-day moving average, 50 years’ worth of data suggest good odds for positive forward returns.

Long-term investors should take advantage of the potential deterioration in sentiment over the next couple of months to add to the asset classes and sectors that are most likely to benefit, as the U.S. emerges from recession in 2021. Consider adding to U.S. small caps, cyclicals like financials, industrials, materials and consumer services, and non-U.S. stocks, including Japanese and emerging markets equities.

This article is based on Lisa Shalett’s Global Investment Committee Weekly report from Nov 23, 2020, “Light at the End of the Tunnel.” Ask your Financial Advisor for a copy or find an advisor. Listen to the audiocast based on this report.

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