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M&R Capital Management 4Q2020 Market Update - John Maloney

January 4, 2021

The year 2020 concluded with a surge in the equity market, as asset prices generally responded to the unprecedented fiscal and monetary stimulus the Federal government has deployed. Congress has just passed, and President Trump signed, yet another $900 billion fiscal stimulus package, which augments the $2.6 trillion in stimulus spending since February. Monetary stimulus of another $1.5 trillion has been promised by the Federal Reserve, which stated that interest rates will stay near zero until the annual inflation rate reaches 2%, and unemployment drops to pre-pandemic levels.

The near-term growth outlook remains uncertain, with rising new COVID-19 cases, hospitalizations, and fatalities, which have prompted further state and local restrictions. There are signs of an increasing drag on virus sensitive activity and businesses. Reflecting this, both services and manufacturing business activity slowed in December, as the services Purchasing Managers’ Index (PMI) slipped to 55.3, from 58.4 in November, and the manufacturing PMI eased to 56.5 in December from 56.7 in November.

Holiday sales, tracking from October 11th through December 24th, gained a respectable 3%. Not surprisingly, in store sales declined 8%, as consumers shifted to online purchases in response to the COVID-19 surge. Online sales vaulted 49% year-over-year.

The equity markets have largely shrugged off this near-term weakness, as both Pfizer and Moderna vaccines have received emergency authorization under the Warp Speed program, and inoculations have commenced. While the Center for Disease Control (CDC) has issued guidelines for the order in which different groups will receive vaccination, the governors of each state have the final say, and there has been some initial confusion in the distribution channel, which is hampering the vaccination timeline. Still, it is anticipated that by mid-2021, all Americans who want to be vaccinated will have the opportunity to receive the two shots required.

We would not be surprised to see some near-term weakness in the stock market, as extreme optimism has stretched prices and valuations, particularly of the mega capitalization growth stocks which performed so well in 2020. However, we would expect the rally to continue into 2021, as expectations of a strong V shaped recovery predominate. For example, Goldman Sachs has upgraded its forecast of first quarter 2021 growth to 5.0%, and to 5.8% for the full year. If Goldman’s forecast is even directionally accurate, economically sensitive financial, media, and

cyclical issues might well continue the outperformance they registered in the fourth quarter of 2020, and the advance in stock prices will broaden out.

To quote Winston Churchill, we might conclude, “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”(1)   We can foresee both the end of the pandemic and the beginning of a new cycle of economic growth ahead of us. It is important now to stay focused on your own and loved ones’ personal health and safety while we get there.

(1)  November 10, 1942 speech by Winston Churchill after the second Battle of El Alamein