The world took one big collective sigh of relief on November 9 when Pfizer/BioNTech released data from their Phase 3 trials showing their vaccine was more than 90% effective in preventing COVID-19. This news was followed by similar positive results from both Moderna and AstraZeneca.

These results were nothing short of miraculous, as expectations for efficacy were in the 50% to 60% range, with 75% being a long shot. The news is a major step in the right direction as we attempt to get our lives back to “normal” next year. The question is, what’s next? What should we expect moving forward?

While we wait for a mass vaccine rollout, we are grappling with skyrocketing coronavirus cases around the globe, which means the next three to six months are likely to be difficult. Don’t tell that to global markets, though, as most are at or near all-time highs. While the situation can still make us feel uneasy, we have plenty of reasons to be optimistic on markets heading into the new year.

Stimulus

Unless Congress agrees on a new stimulus deal in the coming weeks, not only will an estimated 12 million Americans lose their unemployment benefits, but countless economic protections will also expire at year-end. As we know by now, Congress usually waits until the last minute to strike a deal, but with the House and Senate on recess until after Thanksgiving, the clock is ticking.

The hope is a smaller deal gets pushed through before year-end to provide immediate relief and give Congress more time to agree on a larger, more robust bill. Markets agree that additional stimulus is nearly certain and not a matter of “if,” but “when.”

As we like to emphasize at our Bethesda, MD fiduciary financial planning firm, the stock market is not the economy. While the prospect of no additional stimulus until 2021 is worrisome, it does not necessarily mean another correction is around the corner.

For months, we have waited for additional stimulus. Nothing came, and markets still climbed much higher. As confusing as that can seem, it also makes sense. Markets are more focused on vaccine progress and the economic prospects of corporations moving forward, and less with daily COVID-19 cases and government bickering. Markets can overlook a few months of “noise” if the longer-term outlook seems favorable.

Central Bank Policy

The good news is central bank policy is likely to continue its ultra-accommodative stance with respect to quantitative easing and low interest rates, which is typically a good recipe for risk assets. The European Central Bank (ECB) and U.S. Federal Reserve combined hold a total of ~$15.2 trillion of assets on their balance sheets. The total assets among the five largest central banks sit north of $25 trillion—yes, trillion!

What does this mean? In short, markets have the potential to continue to grind higher even with low to modest economic expansion, as the prospects of investing in low yielding cash or Treasury bonds has limited appeal.

Now, this ultra-accommodative strategy won’t last forever, but it seems likely to remain for at least 2021. The statement of “don’t fight the Fed” should be changed to “don’t fight the central banks.” They have drawn on their full arsenal this year, which has helped propel global markets higher.

Inflation

In my opinion, the big wild card in 2021 is inflation. While it has been muted for nearly a decade, signs indicate it’s finally making a comeback.

To start the year, the 12-month inflation average was inching toward 3%, near its highest level in the past five years. This trend continued through much of January but was subdued in the second quarter once COVID-19 and nationwide lockdowns went into effect. Since June, we have seen inflation pick up, but this mainly offsets the prior quarter’s decline. It is too soon to tell where inflation is headed, but it is something to keep tabs on.

As we head into 2021, if inflation continues to inch higher, the Federal Reserve will find themselves in a tough spot. They had used 2% inflation as their target to start raising interest rates. Well, it seems the Federal Reserve realized they were boxing themselves into a corner and in August announced a major policy shift.

The Fed indicated their focus will be on “average inflation targets” and will allow inflation to run above the 2% target for some time before taking action. This can be interpreted as a bullish outcome for both equities and bonds, as lower rates will remain for even longer.

While this buys the Federal Reserve some time, if inflation trends higher, they will likely take action and raise interest rates—something tried a few times in past years with unfavorable results on markets.

It goes without saying that 2020 has been a difficult year for everyone, and we hope next year brings better times. Stay tuned ...

Discuss your situation with a fee-only financial advisor.

The commentary on this website reflects the personal opinions, viewpoints and analyses of the Divergent Planning, LLC employees providing such comments, and should not be regarded as a description of advisory services provided by Divergent Planning, LLC or performance returns of any Divergent Planning, LLC Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Divergent Planning, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

Divergent Planning, LLC provides links for your convenience to websites produced by other providers or industry related material. Accessing websites through links directs you away from our website. Divergent Planning, LLC is not responsible for errors or omissions in the material on third party websites, and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from use of those websites.

Divergent Planning, LLC is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Divergent Planning, LLC and its representatives are properly licensed or exempt from licensure. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Divergent Planning, LLC unless a client service agreement is in place.

General Notice to Users: While we appreciate your comments and feedback, please be aware that any form of testimony from current or past clients about their experience with our firm on our website or social media platforms is strictly forbidden under current securities laws.