Upbeat Investors Look Past Covid-19, Related Woes

11/24/2020 | 05:06pm

By Harriet Torry

Among the big reasons for climbing stock prices is investors' optimism about the strength of the economic recovery in the years ahead.

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 year after."

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 economic stimulus.

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 pandemic.

"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 University.

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 layoffs.

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 national average.

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 harriet.torry@wsj.com

(END) Dow Jones Newswires

11-24-20 1705ET

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