Markets, Biden and vaccines

US President Joe Biden begins to shape his administration and new vaccines are released but a February market correction is a likely scenario   

30 January 2021 | Shane Oliver, AMP Capital (White House Image)

The US and other share markets including Australia’s had a huge rally from early November supported by positive news regarding vaccines, more fiscal stimulus and monetary easing. This left them stretched and vulnerable to a correction which we may now be starting to see unfold as investors wait for hard evidence that the vaccines are working and that more US stimulus will actually be passed by Congress.

It’s quite common for US shares to rally after the President is takes office in January and then see a correction in February as investors wait for the new Administration to deliver. Global and Australian shares will also be impacted by any broader correction out of the US through February and it wouldn’t be surprising to see a 10% or so top to bottom decline.

That said, we would view this as just a correction in a rising trend as the combination of stimulus and vaccines drive economic and earnings recovery and monetary policy remains easy. While investor sentiment is stretched, it’s too early to expect a cyclical bull market top with earnings still being revised up, inflation low and central banks remaining dovish. 

The frenzy of US retail day traders pushing up stocks that have been shorted by high profile hedge funds causing their prices to surge is creating a lot of noise and messing up the shorting strategies of some hedge funds, but it’s unlikely to have a lasting fundamental impact.

US policy developments not particularly surprising

First, it’s clear that Biden’s $1.9bn stimulus plan will take time to pass through Congress and will get cut back to say $1-$1.5bn to get enough Republican’s and moderate Democrats on side, either as a regular bill (which needs support from 10 Republicans) or as part of the budget reconciliation process or a combination of the two. Some minor delay and a cutback to $1-$1.5 trillion are not major concerns given its hot on the heels of the $900bn stimulus, the ambit claim of $1.9 trillion risks overcooking the economy and even another $1 trillion at 4.5% of GDP is a lot. But the argy bargy around this may keep investors on edge until its finally passed. 

Second, the Fed left monetary policy on hold as expected, sticking to its commitment not to raise rates until inflation is at target and set to exceed it for a period and full employment has been reached with Powell reiterating that it’s too early to consider tapering quantitative easing. Powell also indicated that any pick-up in inflation in the months ahead is likely to be transitory, which means the Fed will look through it.  

The past week has seen a further decline in new coronavirus cases – particularly in the US, Europe, the UK, Japan and Canada. This largely reflects the tighter lockdowns and other restrictions seen since late last year rather than vaccines where deployment is still limited in most countries. 

Investors are concerned about vaccine roll out and efficacy – but more vaccines are coming, and efficacy will need to be assessed against severe infections and deaths as well as new cases. The past week has seen Novavax report that trial results showed its vaccine is 89% effective in the UK and 60% in South Africa. Johnson and Johnson reported 72% effectiveness for its vaccine in the US, 57% in South Africa and 66% in Latin America and that it prevents 66% of moderate to severe cases, 85% of severe infections and 100% of hospitalisations and deaths.

Consistent with coronavirus coming back under control in Australia and restrictions being eased our weekly Economic Activity Tracker for Australia moved higher over the last week to be now back to around flat on a year ago. By contrast our US Economic Activity Tracker moved sideways and remains soft and down from its September high. And our European Economic Activity Tracker rose slightly over the last week but remains very soft. 

The IMF revised up its global growth forecasts. This is probably old news and private forecasters were already there. But after years of growth around 3%, the global economy is estimated by the IMF to have contracted -3.5% last year, which is bad but at least not as bad as the -5.2% contraction it was forecasting in June.

It revised up its 2021 growth forecast to 5.5% (mainly due to the US) and is forecasting +4.2% in 2022. These forecasts are similar to our own and also assume that thanks to vaccines and better containment coronavirus will reach low levels everywhere by end 2022.

Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital