Upbeat Investors Look Past Covid-19, Related Woes
By Harriet Torry
Among the big reasons for climbing stock prices is investors'
optimism about the strength of the economic recovery in the years
While recent data show economic growth slowing and consumer
confidence flagging, markets are forward-looking and betting the
recovery will gain steam, analysts say, particularly with Covid-19
vaccines on the horizon. They are cheered by hopes the shots will
ease uncertainty and eventually enable people to fill airplanes,
sports stadiums, restaurants and other places of business hardest
hit by crisis.
Investors are looking to mid- to late-2021 when "conditions
should return to normal and we're not going to have too much
long-term disruption to the economy," said Gus Faucher, chief
economist at PNC Financial Services Group.
Some forecasters are even more optimistic, expecting economic
activity to surge with the release of pent-up demand. Households
have paid down debt and the personal saving rate was a high 14.3%
in September, according to the Commerce Department, compared with
8.3% before the pandemic. That suggests households have money to
spend, when they can.
"This is one of these times where the disconnect between markets
and the economy makes sense," said Joseph Brusuelas, chief
economist at RSM US. He said if a vaccine is successful, that "does
create conditions for well above-trend growth next year and the
Other factors behind the market gains include size -- public
companies traded on financial exchanges tend to be large, which is
an advantage now -- and the prospect of continued government
Unlike small and privately held businesses, the big public
companies in the major stock indexes can more easily access capital
and have robust balance sheets to get them through periods of
turmoil. That buffer enabled large firms to adapt more quickly to
rapid technological changes brought about by the pandemic, like the
boom in e-commerce and contactless delivery, a big advantage
compared with the smaller businesses and family-owned stores and
restaurants that are going bust in droves due to the coronavirus
"Size gives all kinds of opportunities for flexibility, and
flexibility was super important in a situation like this [pandemic]
when no one knew what was going to happen next," said Laura
Veldkamp, a professor of economics and finance at Columbia
Economists expect the next few months to be tough for the U.S.
economy. Consumer spending is slowing, with retail sales growth
weakening in October and restaurant reservations declining. The
number of new applications for unemployment benefits rose sharply
in the week ended Nov. 14, reflecting continued high levels of
Credit- and debit-card data collected by research firm Affinity
Solutions and research group Opportunity Insights showed that
overall spending was down 4.5% in the week ended Nov. 8 compared
with January levels. Spending in states with the highest daily
reported Covid-19 cases per head -- like South Dakota, Minnesota,
Nebraska and Wisconsin -- has declined more sharply than the
IHS Markit, an economic analysis firm, projects U.S. gross
domestic product will expand at a 3.9% annual rate in the current
fourth quarter, down from a record 33.1% pace in the third quarter
when many businesses reopened after pandemic-related shutdowns.
Investors are encouraged by continued government stimulus and
the possibility of more. The Federal Reserve has indicated it won't
be raising interest rates from near zero any time in the near
future. It has been buying $80 billion in Treasurys a month and $40
billion in mortgage bonds, net of redemptions, since June after
buying even larger quantities beginning in March to curb market
dysfunction. Economists say central bankers could provide more
stimulus, if they decide it is needed, by shifting the composition
of these purchases toward longer-dated Treasurys.
Top Democrats are calling on Senate Majority Leader Mitch
McConnell (R., Ky.) to restart negotiations on another coronavirus
relief bill after months of stalemate.
Some economists are more circumspect about financial markets'
enthusiasm, saying that investors aren't factoring in the potential
for more stringent lockdown measures, like those recently imposed
in Europe, if the pandemic worsens in the U.S. If bars, restaurants
and gyms have to shut down again widely, the unemployment rate is
likely to rise after gradually dropping to 6.9% in October from
nearly 15% in the spring.
James Knightley, an economist at ING Financial Markets LLC, said
the market's growth outlook is "very rose-tinted" as the
macroeconomic backdrop could deteriorate in the new year, once a
nationwide eviction moratorium, a suspension of student-debt
payments and tax breaks for businesses lapse. Several
unemployment-aid measures passed in the spring have already expired
or are set to expire at the end of the year.
"The optimism is there, I just fear the near-term growth story
is going to be very tough for a lot of households and businesses,"
Mr. Knightley said.
Write to Harriet Torry at email@example.com
(END) Dow Jones Newswires
November 24, 2020 17:05 ET (22:05 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.