2020 Hangover

It was a down week within an up month for the Market in a simply unprecedented environment. It’s a new year, with the same challenges. January has been like a 2020 hangover. You’re ready to move forward, but still have to account for what happened. It was a terrible week for our country. Record deaths were recorded from the virus and a second impeachment of the President occurred as the transition of power proves anything but peaceful.

The Stock Market is not the Economy and the Economy is not the Stock Market. Indeed, there is definite overlap, but it’s worth reminding time and again. There’s a clear disconnect right now. The Market continues to look past the present and seems to really like what’s ahead. I want to touch on a number of items that happened this week, which we feel are significant. There’s so much going on.

The Banks kicked off Earnings Season with solid reports. That’s really important, as they represent a lot of the recovery Trade. The stocks were in sell-the-news mode as a lot of good has been priced forward. That might be a theme for the overall Market. Certain areas within Tech fit that bill. The Dow and S&P seem to be due for a breather anyway. We still see a good year ahead for investors, with any weakness being buyable.

President-elect Biden rolled out an economic stimulus plan last night. The goal is to kickstart our Economy as it shows more signs of stalling. December retail sales came in below expectations. Last week’s jobless claim was back near 1 Million for the first time since last Spring. The Economy could use a boost.

The $1.9 Trillion spending number created some sticker shock. But the cost of doing nothing could be far more expensive. The Fed remains steadfast in its support. The Market has been celebrating the prospects of additional stimulus for a while and sees it as a bridge to a fully reopened Economy later in the year. The price tag will ultimately hit the Market. Paying for the recovery is only a matter of time and could come in the form of higher interest rates or tax hikes, which could cap equity valuations. Higher taxes are going to be a hard sell in Congress. But the Corporate rate seems vulnerable to a slightly higher level. We still don’t think taxes will be an issue until next year, at the earliest.

Most of the Biden plan targets Covid and a reopening of the Economy. But certainly not all of it. The plan includes $1,400-per-person in direct payments to most households. It also includes a $400-per-week unemployment insurance supplement through September. On top of that are funds for Covid testing, vaccine distribution and state and local governments. This proposal is said to be the first round of a two-part strategy. A broader program is expected to be announced in the weeks ahead, with a focus on infrastructure and climate change.

It should come as no surprise that Biden’s proposal includes ideas that Republicans have already rejected. The $15 minimum wage is at the top of that list. Some legislation will need 60 votes in the Senate. Stating the obvious, that requires GOP members to get on board. It’s a tall order, particularly in this environment. The common goal is to get our government to open our Economy, get their kids back to school, and create jobs. The goal is to achieve some sense of normalcy in our lives. The problem is getting a solid majority to agree on how. It’s going to take time and a whole lot of effort, and compromise. Unfortunately, America’s divide has little room for compromise.

From one of our Washington sources this morning:
We view yesterday’s release as an opening bid. In order to get 60 votes in the Senate, Democrats will need to attract Republican support which means that any package that passes will be significantly smaller than the proposal. Republicans just passed a $900 billion COVID-relief package in December. Chances are low that many Senate Republicans will turn around and support a larger package so soon after the December bill. Furthermore, aid for states and local governments will be controversial among Republicans. State and local aid was left out of the December bill because Democrats rejected liability protection for business that reopen. I doubt many Republicans sign on to a bill that includes large sums for state and local governments unless they get something like liability protection in return. Negotiations are likely to take months and could water down the package to the $600- $700 billion range.

Democrats might consider passing the plan under reconciliation rules which circumvent the Senate’s 60-vote requirement but that is not as easy as it might appear. Reconciliation has its own procedures and limits. First, it requires that Congress adopt a budget resolution which will take time to draft and pass. Second, quickly using reconciliation might complicate using reconciliation down the road for a tax/infrastructure bill. It is possible that Democrats could use reconciliation more than once in a calendar year (the government’s fiscal starts on October 1 so it does not line up with the calendar) but multiple reconciliation bills in a calendar year is not a slam dunk. Furthermore, non-budget related items are prohibited from reconciliation, so items like a minimum wage hike could not be included in a reconciliation bill. Also, reconciliation would probably mean that Democrats would move the bill solely with Democratic votes so Progressives might revolt over a bill that they view as too watered down if accommodations are made for centrists.

Expect Republicans to have a renewed embracement of tighter fiscal policy and deficit spending now, something abandoned under Trump. But the new administration will also have to manage expectations from the left-wing of its own party, which feel that this plan doesn’t go far enough. Politicians keep politicking. There’s no sign of that changing anytime soon.

I wrote our Winter Newsletter, which was circulated last week, outlining what a Post-Covid world might look like. A new development this week provides a glimpse of what might lie ahead. A Tech and Health Care coalition that includes Microsoft, Epic, Cerner, the Mayo Clinic, Oracle and Salesforce announced the creation of a vaccination passport. It’s called the Vaccination Credential Initiative (VCI). The goal is to allow businesses, airlines and governments to check if people have received a Covid vaccine to demonstrate their health status in order to safely return to travel, work, school and everyday life while protecting their data privacy.

The stated vision of the VCI is to empower individuals to obtain an encrypted digital copy of their immunization credentials to store in a digital wallet of their choice. It consists of Quick Response codes containing W3C verifiable credentials. The W3C is the World Wide Web Consortium, which established protocols and oversees international standards for the web. This high-tech solution has a low-tech approach too. Those without a digital device can receive paper.

Another important step will be getting health care organizations to embrace the concept and participate in the program. This would be a major undertaking. The system would require substantial resources to incorporate these credentials to VCI’s digital standard. Currently, Americans are given paper cards when they get their Covid vaccines, while patient information is logged in their state immunization registries.

The VCI solution certainly won’t come without controversy. Privacy and ethical concerns are growing as to whether a person who can prove they are vaccinated should have more freedoms than someone who is not. If you think the mask is controversial, just wait until this gets rolled out across the country.

Planet Earth keeps spinning round and round while its citizens face everyday challenges. The challenges presented in 2020, which spilled over to 2021, are anything but normal. But they’re as real as real gets. The response always dictates the result. As we head to this 3-day weekend, in honor of Dr. King, I thought of these words he so eloquently voiced:

“The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy.”

Have a nice weekend. We’ll be back, dark and early on Tuesday.


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