You’re probably aware of the US stock market’s recent frenzy.
In many situations it’s dangerous to bet against the consensus view baked into the price of the financial market. Currently the US stock market looks like it’s priced for perfection. With the distribution of the COVID vaccine accelerating and the unveiling of another J&J one-shot vaccine around the corner, financial market participants have reasons to feel optimistic about the economy and stock market.
The US economy has remained resilient despite COVID-19 infection cases reaching a new peak on January 8th. The fourth quarter earnings in Year 2020 grew at 2% YOY for 60% of S&P 500 companies which have already reported. After leveling out for almost two months at the end of 2020, the unemployment rate fell again in January 2021. Hiring has the potential to resurge from the start of the year, according to the data of some job seeking websites. The size and scale of government stimulus, which includes an additional $900 billion passed before the end of 2021 and very likely another $1 trillion for the near future, exemplifies the government’s determination to invigorate the economy and market.
The market heralds the upside surprise of an unexpectedly large stimulus package and exceptional economic activities. Some financial institutions have begun revising their annual forecasts.
But still, we must be cautious. More COVID-19 mutations are plausible, considering the scale of the infections. While Pfizer and Moderna scientists have stated the virus should be manageable with either new strain specific vaccines or boosters, the bottleneck in the production could limit the vaccine’s supply for some time. Other approved vaccines, such as the Oxford-AstraZeneca vaccine, might be less effective against new mutations, according to the latest report from Bloomberg News. The coordination among different countries’ governments in the vaccination campaign will also play a key role in the effectiveness of the vaccine. Israel was the leading country in vaccination speed, but was still heavily impacted as the new UK virus mutation proliferated through the population of unvaccinated people. This was partly due to the Israeli government’s lack of foresight.
We believe that the Biden administration faces high stakes on controlling the virus and is working diligently towards the promise. But the future still holds many unknowns.
Even though the market has been rising unstopped for the past few days, we need to keep our strategic allocation. Financial market participants tend to place relatively more weight on recent events than statistics justified. However the stock market pricing depends on a lot of factors. We must evaluate the broader framework to analyze current events.
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