A month after the announcement of the first highly effective COVID-19 vaccine, positive momentum is building. Potentially game-changing vaccines, a new round of government spending, and continued, pedal-to-the-metal monetary policy are nurturing a boom environment as we end a most challenging year.

While COVID-19 cases grow globally, and in the wake of the election, it is easy to lose track of market trends. In no particular order, here are a set of observations about recent trends worth noting.

Observations:

  • The value of all U.S. stocks is nearing $42 trillion, or 2 times the whole economy’s size ($21 trillion GDP).
  • High risk is running rings around safety. The highest risk stocks in the S&P 500 are up 26% in the past month, while the safest stocks were up 2% (based on the S&P 500 High and Low Beta Indices). Meanwhile, long-term Treasury bonds and gold are down 1% and 6%, respectively.
  • Equity analysts are racing to increase their earnings forecasts. Analysts expect $165 of S&P 500 profits over the next 12-months, up from $140 last spring. The $165 figure is still short of the pre-COVID level of $180. Nevertheless, if the current pace continues, full recovery by winter’s end seems likely.
  • The yield curve is steepening, pointing to a growth pickup ahead. The yield spread between the 10-year U.S. Treasury and a 3-month T-Bill rose to +90 basis points (+0.9%) last week. Last February, the spread was negative -25 basis points (-0.25%).
  • Corporate credit spreads, an indicator of market worry over defaults, tightened to 240 basis points (2.4%) for Baa-rated corporate bonds over U.S. Treasury bonds recently. Sectors such as travel, which suffered most in 2020, are seeing large jumps in bond prices.
  • Inflation expectations are heating up. The long-run inflation rate priced into Treasury Inflation-Protected Securities (TIPS) is near 2%, above 1.7% levels pre-COVID.
  • Industrial metals prices are surging, rising 13% in November alone and up over 50% from March. The increase likely reflects pent-up demand and shortages in early-stage production processes.
  • The U.S. dollar continues to weaken. The dollar index is down about 10% against most major currencies as global investors assess prospects for new fiscal spending, deficits, and ongoing monetary easing.

While these facts, in normal times, would call for the winding down of stimulative policies, there is no such move afoot today.

Final Thoughts

These observations paint a picture vastly different from a few months ago. While COVID-19 cases are rising, markets remain forward-looking, and are seeing better things ahead. In some ways, a boom mentality may be emerging as COVID-19 vaccines are rolled out, new fiscal measures are likely to be enacted, and central banks keep their foot on the gas.

We do worry that, at some point, high stock and bond valuations could assert themselves, putting downward pressure on asset prices. Historically low interest rates, coupled with high stock valuations — particularly among high growth / high momentum market segments — could come back to haunt investors. Unwinding ultra-accommodative policies and reconciling high valuations are likely to be challenging issues in 2021-2022.

For now, the path of least resistance is up, and markets are booming. And with good cause. Promising vaccines for COVID-19 are expected to be deployed very soon. Highly effective and rapidly developed vaccines have the potential to thwart a significant threat to the global economy. There is more work ahead, but markets say that we appear to be on the right track.

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