Looking Ahead to 2021: Investment Implications of Potential Covid-19 Vaccine, Possible Divided U.S. Government and Accommodative Monetary Policy
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CAPITAL MARKETS COMMENTARY Looking Ahead to 2021: Investment Implications of Potential Covid-19 Vaccine, Possible Divided U.S. Government and Accommodative Monetary Policy BY ABE SHEIKH, CO-CIO, JOE BELL, PORTFOLIO MANAGER, AND AMISHA KAUS, PORTFOLIO MANAGER • DECEMBER 2020
KEY TAKEAWAYS:
» A POTENTIAL COVID-19 VACCINE IN 2021 WOULD BE A BIG POSITIVE FOR THE ECONOMY.
Moderna, Pfizer and AstraZeneca have all separately released what appears to be promising results
for COVID-19 vaccine candidates. A widely available and effective vaccine for the virus in 2021 could
benefit economic activity very significantly.
» A DIVIDED U.S. GOVERNMENT HAS HISTORICALLY BEEN VERY ATTRACTIVE FOR STOCKS.
The S&P 500 Index has averaged a return of 15.9% a year during a divided government—3% higher
than the average return from 1950–2019. Should the executive and legislative branches be divided
(depending on results of the Georgia Senate race), the chances of significant pieces of legislation being
passed become smaller, providing investors with the potential of more certainty about the future.
» U.S. STOCKS ARE LIKELY IN A SECULAR BULL MARKET. U.S. real GDP has rebounded 33% in
Q3 2020 after falling 31% in Q2 2020, while U.S. stocks have risen sharply off their lows in late
March 2020. The combination of overwhelming fiscal and monetary stimulus has likely succeeded
in halting deleveraging by businesses and consumers brought on by the COVID-19 recession. We
expect credit to expand going forward and the business cycle to continue for many years to come.
» MONETARY POLICY IS LIKELY TO REMAIN ACCOMMODATIVE. With inflation still below targets,
and elevated unemployment rates, central banks around the world are likely to keep interest rates
anchored to near zero levels for the foreseeable future.
» MEEDER’S TACTICAL PORTFOLIOS FAVOR RISK-ON ASSETS. At the asset allocation level, our
tactical portfolios are overweight stocks vs. bonds. Within fixed income, we favor high yield and
emerging market debt over treasuries and investment grade debt.
Why Meeder? We are dedicated to improving investor outcomes by keeping clients committed to their
investment strategy throughout a full market cycle. We view tactical allocation as a risk management tool.
We believe that tactical managers can provide downside protection, lower volatility, and offer more complete
diversification than strategic managers.
POTENTIAL COVID-19 VACCINE IN 2021 WOULD BE A BIG POSITIVE FOR THE ECONOMY
EXHIBIT A: TRIAL RESULTS FOR COVID-19 VACCINES SHOW A
VERY HIGH RATE OF EFFECTIVENESS Given the economic disruption caused by COVID-19 due to
shutdowns and quarantines, a widely available and effective
Influenza A (Flu) Vaccine 37.0%
(2019–2020 Flu Season)
vaccine for the virus would likely benefit economic activity
significantly by allowing a return to normal life for billions
Influenza B (Flu) Vaccine 50.0% of people around the world. As Exhibit A shows, Moderna,
(2019–2020 Flu Season)
Pfizer/BioNTech, and Oxford (UK)/AstraZeneca have all
Oxford (UK)/AstraZeneca
separately released promising results of clinical trials for
70.0%
COVID-19 Vaccine Trial Results potential COVID-19 vaccines. Historically, vaccines available
for the common flu have had between a 40 to 60% success
Moderna COVID-19 Vaccine 94.5%
Trial Results rate at preventing infection. Results for the COVID-19
vaccine are demonstrating effectiveness as high as 95%,
Pfizer COVID-19 Vaccine 95.0% which is much higher than most scientists anticipated.
Trial Results
0% 20% 40% 60% 80% 100%
RATE OF EFFECTIVENESS
Source: CDC, University of Oxford, Moderna, PfizerA DIVIDED U.S. GOVERNMENT HAS BEEN Massive fiscal and monetary stimulus in 2020 in response
ATTRACTIVE FOR U.S. STOCKS to the economic damage from COVID-19 has resulted in a
EXHIBIT B: U.S. EQUITIES HAVE HISTORICALLY DONE WELL sharp bounce back for the economy and stock market. U.S
WHEN THE GOVERNMENT IS SPLIT real GDP has rebounded 33% in Q3 2020 after falling 31% in
20% Q2 2020. While the S&P 500 has rallied more than 40% off
AVERAGE S&P 500 ANNUAL RETURN (1950–2019)
18% its bear market low on March 23, the Russell 2000 small-
18.3%
16%
cap and S&P 400 mid-cap indexes have gained more than
15.9% 15.7% 80% and 79% respectively during this same time frame.
14%
In addition, we have observed strong participation from
12% 13.2%
a variety of sectors and industries outside of the big tech
10% 11.0% stocks that have dominated performance in recent years.
8% These are historically characteristics of a healthy stock
8.7%
6% market and an economic expansion.
4% EXHIBIT D: FISCAL AND MONETARY SUPPORT HAS ENABLED
CORPORATE BOND MARKETS TO RECOVER AND EXPAND
2% DESPITE THE GLOBAL COVID-19 PANDEMIC
0% 7.0
Democratic Democratic Democratic Republican Republican Republican $6.9
President, President, President, President, President, President,
TOTAL U.S. CORPORATE BOND MARKET VALUE (USD TRILLIONS)
Trillion
Democratic Republican Split Democratic Republican Split
Congress Congress Congress Congress Congress Congress
MAKE UP OF WHITE HOUSE AND CONGRESS
Source: LPL 200,000
6.5
DAILY # OF COVID-19 CASES IN THE U.S.
Based on a historical analysis of stock market returns,
should we have a divided government—a Democratic
president and split Congress—it would offer one of the most $6.1
Trillion
attractive opportunity sets for stock market investors. The 150,000
6.0
results of the Georgia Senate race on January 5, 2021,
3/27/20
will provide investors with more clarity on this front. The President signs
CARES Act,
S&P 500 Index has averaged 15.9% a year with a Democratic largest
economic 100,000
President and a divided Congress—about 3% higher than 5.5 3/15/20
Fed cuts rates to 0%, relief package
in history
the average return on the S&P 500 from 1950-2019. One announces record
$700 billion of QE
explanation for this is the higher degree of certainty about
the future that a divided government provides investors. 50,000
5.0
Should the House of Representatives and Senate be divided,
the chances of any significant pieces of legislation being
passed becomes smaller.
4.5 0
Nov-18 Feb-19 May-19 Aug-19 Nov-19 Feb-20 May-20 Aug-20 Nov-20
U.S. STOCKS ARE LIKELY IN A SECULAR Bloomberg Barclays U.S. Aggregate Corporate Market Value (USD)
BULL MARKET U.S. Daily COVID-19 Cases (CDC)
EXHIBIT C: U.S. GDP GREW AT A RECORD PACE IN Q3 2020 Source: Bloomberg
FOLLOWING ITS SHARP DECLINE IN Q2 2020
40% Evidence suggests that the combination of fiscal and
33.1% monetary stimulus has likely succeeded in halting—and
ANNUALIZED GDP QUARTERLY GROWTH RATE (%)
30%
reversing—deleveraging by businesses and consumers.
20% Exhibit D shows the market value of U.S. investment grade
bonds. It suggests that credit expansion continue, with
10%
year-to-date U.S. bond issuance already surpassing $2 trillion
2.7% 2.1% 1.3% 2.9% 1.5% 2.6% 2.4%
0% through the end of October 2020. That is already higher than
-5.0%
any calendar year in history. As economic activity picks up
-10%
again, we expect credit to expand and the business cycle to
-20% continue for many years to come.
-30%
-31.4%
-40%
Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20
Source: BloombergEXHIBIT E: HIGH U.S. PERSONAL SAVINGS RATES MAY EXHIBIT G: LOWER INFLATION EXPECTATIONS ARE KEEPING
PROVIDE FUEL FOR FUTURE ECONOMIC GROWTH 10-YEAR GLOBAL BOND YIELDS BELOW 1%
1.0
40
0.8 0.88 0.87
0.80 0.77
35 0.6 0.69
U.S. PERSONAL SAVINGS RATE (%)
0.4
PERCENT
30 0.2 0.32
0.0
25 0.01
-0.07
-0.2 -0.15
20 -0.4
-0.48
-0.6 -0.54
15
14.3 -0.8
Australia
Canada
Denmark
Euro Area
Japan
New
Zealand
Norway
Sweden
Switzerland
United
Kingdom
United
States
10 8.9%
5
0 Source: Bloomberg
Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Lack of inflationary pressures are keeping yield premiums
Source: FRED (Federal Reserve Bank of St. Louis) low across much of the global government debt. 10-year
As we move into 2021, we expect credit to continue to global bond yields that typically respond to inflation by
expand, helping the economic recovery. In addition, pent up rising, remain below one percent, and in some cases
savings may help boost the economy too. The most recent negative, across most developed economies. This implies
data suggests that U.S. consumers are saving more than market expectations of low interest rates over the next
14% of their income, which is more than 5% higher than its few years.
long-term average of 8.9% (1959–present). A widely available
vaccine could improve consumer sentiment, leading to a MEEDER’S TACTICAL PORTFOLIOS FAVOR
potential unwind of the large savings consumers have built RISK-ON ASSETS
up over the last year or so. Meeder’s tactical models suggest a more favorable outlook
for risk-on assets compared to risk-free assets. At the asset
MONETARY POLICY IS LIKELY TO REMAIN allocation level, our tactical portfolios are overweight stocks
ACCOMMODATIVE vs. bonds, with the Meeder Muirfield Fund being fully
EXHIBIT F: LOW HEADLINE INFLATION ACROSS G-10 ECONOMIES invested in stocks.
WILL
4.5 LIKELY KEEP GLOBAL CENTRAL BANK POLICIES 4.5
ACCOMMODATIVE EXHIBIT H: THE REWARD OF OUR STOCKS MODEL OUTWEIGHTS
THE ABOVE-AVERAGE MARKET RISK
4 4
60
3.5 3.5
3 3
50
PERCENT
PERCENT
2.5 2.5
REWARD AND RISK VALUES
2 2
20-Year Average 40
1.5 1.5
Tactical Equity Exposure =
1 1 REWARD/RISK
30
0.5 0.5
0 0
20
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
G10 Headline Inflation 20-year Average
Source: Bloomberg 10
Headline inflation levels remain low across much of the
developed world. G-10 economies’ average headline inflation 0
NOV-19 FEB-20 MAY-20 AUG-20 NOV-20
number remains well below its 20-year average. The Federal RISK REWARD
Reserve and other global Central Banks are likely to keep
Source: Meeder Investment Management
their respective policy rates low until they see significant
uptick in inflation figures. The Federal Reserve is expected to
keep their benchmark short-term interest near zero percent
through at least 2023.Although market risk is still higher than its long-term Within fixed income, our proprietary fixed income models
average of 16, the reward component of our tactical favor exposure to high yield and emerging market bonds
allocation model outweighs the above-average risk in the over U.S. Treasuries and investment grade bonds.
stock market. Exhibit I displays some of the reasons for this EXHIBIT J: OUR PROPRIETARY FIXED INCOME MODELS ARE
strong reward reading. SIGNALLING STRENGTH IN HIGH YIELD AND EMERGING MARKET
DEBT OVER U.S TREASURIES AND INVESTMENT GRADE BONDS
EXHIBIT I: DRIVERS OF THE REWARD COMPONENT OF OUR HY and EM
TACTICAL MODEL Strength
WHAT IS DRIVING REWARD REWARD
HIGHER? COMPONENT
Historically low interest rates
Long-term model
and inflation favor equities
Long- and Short-
Trends and Momentum Positive
term models
Market Breadth indicates high
Long- and Short- HY and EM
participation from many sectors
term models Weakness
and industries
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
Global Leading Economic
Long-term model High Yield Bonds Emerging Market Bonds Threshold
Indicators continue to improve
Source: Meeder Investment Management
Credit markets remain healthy
Long-term model
and showing signs of improving
At Meeder, we are dedicated to improving
Institutional demand has been Intermediate-term investor outcomes by keeping clients committed
strong model to their investment strategy throughout a full
Source: Meeder Investment Management
market cycle. We view tactical allocation as a
risk management tool. We believe that tactical
managers provide downside protection, lower
volatility, and offer comprehensive diversification
to help investors to arrive at their ultimate
investment destination.
Please contact your Meeder Advisor or Consultant
at 1.866.633.3371 if you have any questions.
6125 Memorial Drive, Dublin, OH 43017 | 1.866.633.3371 | meederinvestment.com
The views expressed herein are exclusively those of Meeder Investment Management, Inc., are not offered as investment
advice, and should not be construed as a recommendation regarding the suitability of any investment product or strategy for an
individual’s particular needs. Investment in securities entails risk, including loss of principal. Asset allocation and diversification
do not assure a profit or protect against loss. There can be no assurance that any investment strategy will achieve its objectives,
generate positive returns, or avoid losses.
Commentary offered for informational and educational purposes only. Opinions and forecasts regarding markets, securities,
products, portfolios, or holdings are given as of the date provided and are subject to change at any time. No offer to sell, solicitation, or
recommendation of any security or investment product is intended. Certain information and data has been supplied by unaffiliated third
parties as indicated. Although Meeder believes the information is reliable, it cannot warrant the accuracy, timeliness or suitability of the
information or materials offered by third parties.
Investment advisory services provided by Meeder Asset Management, Inc.
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