Welcome to the January 2021 Newsletter. This month, we’re discussing the coronavirus (COVID-19) vaccine, the economy, and other news.
Summary
The path to normalcy during this pandemic, both in economic and social living terms, has always been through vaccine science. In a remarkable development, the messenger RNA (mRNA) technology has resulted in two successful vaccines in less than one year. A substantial level of pent-up consumer demand has formed during this pandemic. We expect this to contribute to corporate revenue, profit margin, and earnings growth in 2021 and 2022.
But investors should not be surprised to see short-term volatility during the next two years. Even in a bull market, which we are in, the stock market does not go straight up. Investors must maintain their courage and patience to ride out any short-term pullbacks.
In the meantime, employees should continue to make their weekly, biweekly, or monthly contributions to their employer’s retirement plan and personal and spousal IRAs. At this time, additional money can be added to an investor’s stock market allocation, but only on a dollar-cost-average basis. All portfolios remain fully invested.
The Economy
Employment
U.S. nonfarm payroll employment rose in November by 245,000, and the unemployment rate decreased by 0.2 points to 6.7%. Employment gains occurred in transportation and warehousing, professional and business services, and healthcare. Government and retail employment declined. This was the seventh consecutive month the unemployment rate fell.
The October payroll number decreased by 28,000 to 610,000. The September payroll number was revised up by 39,000 to 711,000. The rolling three-month payroll average decreased to +522,000 this month from +934,000 last month. We are still adding jobs, but at a slower rate than earlier this year. The Federal Open Market Committee (FOMC) has lowered their 2021 projections for unemployment to the range of 4.7 – 5.4%.
Gross Domestic Product (GDP)
The Bureau of Economic Analysis said the second estimate of the 2020 third-quarter GDP increased by 33.4%.
We’re raising our 2021 projections for GDP to the range of 3.5 – 4.5%.
Inflation
Annual inflation decreased to 1.1% in November, as measured by the Personal Consumption Expenditures (PCE) index. The core PCE index, which excludes food and energy, was unchanged in November at 1.4% from October. The Fed’s long-term target remains at 2%. It’s unlikely the Federal Reserve will allow interest rates to measurably increase until inflation reaches 2% or more — and sustains that level for a significant period of time.
Long-term inflation expectations can be determined by measuring the differences between Treasury bond yields & TIPS real yields of the same maturities. Results are:
| Bond Maturities | Annual Inflation Expectations |
| 5 Year | 1.95% |
| 10 Year | 1.99% |
| 30 Year | 2.02% |
This month’s estimated annual inflation expectations are a whopping 0.2% higher on average than last month’s. The FOMC is projecting 2021 inflation to run 1.7 – 1.9%.
Stock Market
Commentary
Even with the recession in early 2020, the U.S. stock market had another great year:
- The DJIA was up 7.2%.
- The S&P 500 Index was up 16.3%.
- The tech-heavy NASDAQ Index was up 44%.
- NASDAQ is now up 94% over the past two years.
Such high-powered growth tends to not repeat itself – reference 1998 & 1999 vs 2000 & 2001. A broadly diversified portfolio is not only wise but also reduces volatility. International stocks and small- and mid-cap stocks will likely do well in 2021 – perhaps exceeding the S&P 500 index.
Positive indicators for 2021 include:
- Vaccine availability
- Fiscal stimulus by Congress
- Monetary stimulus by the Federal Reserve
- Low interest rates
- Decreasing unemployment
Negatives for the year could be:
- The results of the Georgia runoff senatorial election
- Excessive exuberance by investors
- A highly valued stock market
We will always have another stock market correction – we just don’t know when. When it comes, our recommendation is for investors to exercise patience and courage by “riding it out.”
Stock Market Valuations
In early December, David Kostin, Goldman Sachs chief U.S. equity strategist, said, “As cash is earning zero, the 10-year U.S. Treasury is paying less than 1%. As there is practically no fear of inflation dramatically increasing, we see the U.S. stock market rising for the next two years. Our predictions for the S&P 500 Index are:
- 3700 by 2020 year-end
- 4300 by 2021 year-end (a 16% increase over our 2020 projection)
- 4600 by 2022 year-end (a 7% increase over our 2021 projection)”
Dubravko Lakos, JPMorgan Head of U.S. Equity Strategy, said, “Our favorite sectors [for growth] are consumer discretionary, financials, energy, and healthcare. Equities are facing one of the best backdrops for sustained gains in 2021 because:
- The money supply has increased 24% year over year.
- The vaccine is being deployed.
- Interest rates are very low.
- The business cycle is recovering.
- Stock buybacks will likely resume in 2021.
- Individuals and corporations have a record high amount of cash on the sidelines, some of which will be deployed into the stock market.
The current big brokerage houses are predicting the S&P 500 Index to reach the following by December 2021:
| Citibank | 3800 | BMO | 4200 |
| Bank of America | 3800 | Goldman Sachs | 4300 |
| Morgan Stanley | 3900 | Fundstrat | 4300 |
| Barclays | 4000 | JPMorgan | 4400 |
The S&P 500 Index closed on December 31 at 3756.07. This was not only the closing high for 2020, but also another all-time closing high for the index.
Recommended Action for Your Stock Portfolio
Here are three of our recent favorite technology exchange-traded funds (ETFs):
1. The Invesco QQQ Trust ETF (QQQ), is a widely traded ETF of the largest NASDAQ 100 stocks. Because this ETF is market-cap-weighted, it has 51% of its assets in the top 10 stocks – not so diversified! Its annual expense ratio is 0.20%. This fund is considered large-cap growth, and its risk is above average. It has returned 23.9% per year on average over the past 5 years.
2. A similar fund is the Direxion NASDAQ 100 Equal-Weighted ETF (QQQE). By putting practically the same weighting on each tech stock, it has only 11% of its assets in its top 10 holdings. We prefer this ETF’s diversification in technology stocks over the QQQ. This ETF has a slightly higher annual expense ratio of 0.35%, but with average risk. Its 5-year average performance has been 19.26% per year. Both the QQQ and QQQE ETFs invest at least 90% in the U.S.
3. Our third suggested tech investment is the iShares Exponential Technologies ETF (XT). It also invests in technology companies, but it invests all around the world, with 44.4% of its holdings outside the U.S. Its annual expense ratio is 0.47% and has returned an average of 19.70% per year over the past 5 years. We rate this fund’s risk as average. By owning 198 different stocks, this diversified ETF has only 6% of its assets in its top 10 holdings.
For stock market investors who want technology exposure, we recommend both QQQE and XT.
In the short term, you should only buy on a dollar-cost average basis, spread over 12 months. Keep your stock portfolio highly diversified and low cost.
COVID-19
Vaccine Side Effects
Below are the combined side effects after seven days following the second shot during the Phase 3 trials of the Pfizer and Moderna vaccines:
| SIDE EFFECT | WITH THE VACCINE | WITH THE PLACEBO |
| Fatigue | 60% | 25% |
| Headache | 55% | 25% |
| Joint pain | 35% | 10% |
| Muscle pain | 20% | 10% |
CDC Vaccine Administration Recommendations
Vaccine distribution will broadly apply as follows, but each state can define exceptions. (For reference: Week 1 was the week of December 14.)
Phase 1a (weeks 1-5) is for:
- 21 million high-risk health care workers
- 3 million long-term care residents
Phase 1b (weeks 5-10) is for:
- 19 million persons age 75 and older
- 30 million frontline essential workers, including
- First responders
- Educators
- Food and agriculture workers
- Manufacturing workers
- Prison correction officers and prisoners
- United States Postal System (USPS) employees
- Public transit workers
- Grocery store employees
Phase 1c (weeks 10-20) is for:
- 28 million persons age 65-74
- 81 million persons age 16-74 with at least one high-risk medical condition, such as:
- Kidney disease
- Lung disease
- Heart disease
- Diabetes
- COPD
- Cancer
Phase 2 (week 20 and beyond) is for:
- 77 million persons 16 and older not in phase 1
Phase 3 (week 20 and beyond) is for:
- 73 million people age 0 to 15 (once a vaccine is approved for this age group)
Completed & Planned Vaccine Shipments
On December 13, Alex Azar — Secretary of Health and Human Services — said that the number of doses of the Pfizer and Moderna vaccines combined that have shipped, and will ship, are as follows:
- Week of December 14: 2.9 million Pfizer doses shipped
- Week of December 21: 2.0 million Pfizer doses and 5.9 million Moderna doses shipped
- Week of December 28: 2.67 million Pfizer doses and 2.0 million Moderna doses shipped
- Week of January 4: 4.5 million total doses to be delivered
- Month of January: 50 million doses to be delivered
- Month of February: 100 million doses to be delivered
Vaccine Development
Below is a brief summary of vaccine development for five U.S. pharmaceutical companies and one U.K. company.
Pfizer and their German partner, BioNTech SE, have achieved over 95.3% efficacy with their two-shot vaccine during their Phase 3 study of 44,000 volunteers. The second shot is to be taken three weeks after the first shot. The U.S. originally agreed to purchase 100 million doses of the Pfizer vaccine to be delivered in December through the end of February. In late December, the federal government purchased another 100 million doses, with 70 million to be delivered by the end of June and the remaining 30 million by the end of July 2021.
Moderna’s two-shot vaccine has shown to be 94.1% effective in preventing COVID-19 during their Phase 3 study of 30,000 volunteers. The second shot is to be taken four weeks after the first shot. The U.S. has agreed to purchase 200 million doses, with 20 million delivered in 2020.
Both Pfizer and Moderna vaccines use messenger RNA (mRNA) technology. The mRNA molecules within the vaccine carry DNA instructions to cells in the body to make proteins that impersonate the protein spikes of the SARS-CoV-2 virus (which causes COVID-19). This stimulates the body’s immune response, so the body is primed to attack the real virus rapidly and effectively if and when it shows up in the body.
Johnson & Johnson has developed two potential vaccines that use a weakened form of the common cold virus. One candidate is a single dose, and the other is a two-dose candidate. common cold virus. One candidate has a single-dose regiment, and the other is a two-dose candidate. J&J’s two Phase 3 trials are separate, but they’ll be run at the same time.
First, the company launched a 60,000-person global Phase 3 trial in September based on the single-dose regiment. J&J has carried out the study at nearly 180 locations in the U.S. and eight other countries where transmission rates have been high. Data could be made available at the end of January. If the results are positive, J&J could ask the FDA for emergency use authorization in February. The U.S. has agreed to purchase 100 million doses of the J&J vaccine if the results are positive.
J&J also announced in mid-November they have initiated a 30,000-participant worldwide study on their two-dose vaccine. No other details have been released.
Novavax’s vaccine candidate requires two shots, three weeks apart. The vaccine delivers a protein resembling the spike jutting out from the coronavirus to trigger the production of antibodies and immune cells to fight off the virus. The trial in the U.K. has completed the enrollment of 15,000 individuals between 18 and 84. Interim data is expected to be available during the first quarter of 2021. An additional Phase 3 trial will begin in early January in the U.S. and Mexico at 115 sites involving 30,000 volunteers. The U.S. has agreed to purchase 110 million doses of the Novavax vaccine, but no timetable has yet been established.
Merck recently started clinical trial testing of three potential vaccines:
- Vaccine candidate V591 began Phase 1 testing on August 24.
- Vaccine candidate V590 began Phase 1 testing on November 2.
- Vaccine candidate MK-4482 began Phase 2/3 patient dosing on October 19. It will be several months for results to be published for this trial.
AstraZeneca (a British and Swedish company) and Oxford University are developing a potential vaccine for COVID-19. The vaccine is designed to provide protection by delivering into a person’s cells the genetic code for the spikes protruding from the coronavirus. A Phase 3 trial enrolling 30,000 subjects in the U.S. began in August. During the week of November 22, AstraZeneca announced their vaccine candidate had shown to be 90% effective for those 2,800 volunteers who received only a half dose by mistake in their first of two shots. They received a full dose in the second shot.
As 2,800 subjects are not nearly enough to apply for FDA emergency use approval, AstraZeneca will be continuing their Phase 3 testing in the U.S. and the United Kingdom for several more months. So far, 27,000 of the 30,000 volunteers have been enrolled. The U.S. has agreed to purchase 500 million doses of the AstraZeneca vaccine, but there is no timeline as to when these might become available.
Virus Statistics
As of January 2, the chart below shows a dramatic increase in new cases peaking on December 17 and 18. The timing of this peak is likely due to families coming together to celebrate Thanksgiving. Note the vertical axis changed this month to a peak of 300,000 from 250,000 last month. Unfortunately, we will probably see another peak in mid-January following family gatherings for Christmas.
Below we see the Daily Death chart’s vertical axis changed this month to have a peak of 5,000, whereas last month it was 3,000.
Bond Market
Commentary
While we have a vaccine for the COVID-19 tragedy, the bond market has no relief in sight. For example, short-term U.S. Treasuries are only paying 0.08% per year, while the 30-year Treasury Bond only pays 1.65% per year. CDs are paying 0.50% for 3 months and up to 1.25% for 5 years. All of these “investments” have a negative yield after subtracting taxes and inflation.
The number of FDIC institutions fell from 5,066 to 5,033 during the third quarter. “Problem banks” increased from 52 to 56 during the quarter. Both of these numbers should improve during 2021. But in the meantime, a bond portfolio should have a very short average duration.
Federal Reserve
The Federal Open Market Committee (FOMC) held a two-day meeting on December 15 and 16. The Committee voted unanimously to keep the fed funds rate at the 0 to 0.25% target range and “to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.”
The Fed continues to purchase U.S. Treasury securities at a pace of $80 billion per month and $40 billion per month of mortgage-backed securities. This action keeps longer-term interest rates low.
U.S. Treasury
The U.S. Congress passed the $1.4 trillion omnibus spending bill to fund the federal government through the remainder of the federal fiscal year. This removes the risk of a government shutdown. Congress also passed a $900 billion stimulus bill in addition to the $1.4 trillion omnibus bill, bringing the total amount of spending to $2.3 trillion. This means the Treasury must continue to issue a significant amount of debt securities to fund the fiscal year deficit.
Recommended Action for Your Bond Portfolio
The Fed’s zero-interest-rate policy has caused money market accounts to dramatically lower their interest rates. Bank Certificates of Deposits (CDs) and Treasury bills and notes pay less than 1%. Therefore, our bond recommendations have changed, as we no longer recommend holding excess cash.
Below are our four recommended bond categories for an investor’s bond portfolio:
- Short-term U.S. bond funds
- Intermediate-term U.S. bond funds
- Ginnie Mae Bond funds
- TIPS bond funds
Note that there are no recommendations for CDs, muni bonds, U.S. Treasury securities, high yield bonds, or international bonds. Long-term conservative investors may choose to put no more than 4% of their bond portfolio each into:
- A real estate ETF, and/or
- A gold or silver ETF, or bullion
**Please note: Everyone should maintain a safe, liquid emergency fund for at least six to nine months of home expenses before investing in a stock or bond portfolio.**
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.