The Monthly Five Author Avator

Katie Nixon, CFA, CPWA®, CIMA®

Chief Investment Officer, Northern Trust Wealth Management

November 20, 2020

Your Questions Answered

The tug of war continues, with positive news on the coronavirus vaccine pulling against continued worrisome trends in global infections, hospitalizations and deaths. While news this week has been simultaneously inspiring and troubling, global capital markets are taking it all in stride.

Below, we explore these opposing forces with answers to top client questions on vaccine developments, the potentially “dark winter” ahead, coping with low interest rates and more.


Moderna joined Pfizer in announcing very positive trial results earlier this week. Does that impact the outlook for 2021?

The news on various COVID-19 vaccines this week has been simply amazing. Aside from the notable speed of development, the efficacy rate quoted by both Moderna and Pfizer/BioNTech at over 90% is nothing short of remarkable and has significant implications. Additionally, there was good news from AstraZeneca/Oxford, which noted a significant positive immune response to their vaccine among adults over 70 years old. We expect to hear about more advancements on the vaccine front in coming months, all geared toward illuminating that light at the end of the pandemic tunnel.

The challenges are on the logistics front. These are not insurmountable; however, we caution against becoming overly optimistic related to timelines. It will take well into 2021 for manufacturing capacity and distribution networks to drive widespread vaccinations, and recall that both the Pfizer and Moderna vaccines require two doses administered several weeks apart. For some, help may come sooner: Pfizer announced the intention to seek FDA approval for emergency use of their vaccine, which could make it available to certain populations identified by the CDC by mid-to-late December. So, our outlook for 2021 remains constructive. And finally, on a lighter note, Dolly Parton fans will be happy to know that Ms. Parton’s $1 million donation to pandemic research was used to fund Moderna’s vaccine development.


We have been hearing about the “dark winter” ahead. Could we see a double-dip recession either in the U.S. or in Europe?

The economic fragility in Europe is apparent, and although the automatic stabilizers have kicked in to replace income on a number of important fronts, we do expect that growth will be extremely slow in 4Q and may teeter on or even below the zero bound. Notably, the economic damage in 4Q will not be at the scale and scope of what was experienced in 2Q, but risks are skewed to the downside. With various lockdowns in place, particularly in Germany, which is the economic engine of the Eurozone, activity is extremely slow, and we anticipate that either through adaptation or mandate we will continue to see growth headwinds.

In the U.S., we are seeing a similar decline in some of the high frequency data: TSA data, public transportation data, OpenTable reservations and Apple mobility data (side note: these are all publicly available and are super interesting to watch). Perhaps most importantly, the weekly jobless claims rose after several weeks of improvement, coming in above analyst estimates and pointing to, at best, a loss of momentum and, at worst, signs of deterioration. We don’t expect that the U.S. will head into a recession this quarter, but much like Europe, the risks are skewed to the downside. This is particularly the case in the absence of a fiscal stimulus deal, which appears to be more necessary today than last week.


I am getting nervous: Schools are going remote, restaurants are more restricted, and curfews are being put into place. How do you think all of this negative news will impact the market?

This is always the challenge for investors: how to square the circle between the headline news and the market reaction. We often remind clients that the economy is not the market and vice versa. I would add that the market is a discounting mechanism, so stock prices reflect expectations of the future and not the current conditions. Right now, investors are looking over the “dark winter” and focusing on the mid-2021 recovery as vaccines become widely available and the “next normal” can begin. There will be some differences, of course, and those will be revealed with time; however, the immediate impulse will be powerful under the heady combination of pent-up demand and high national savings. That is not to suggest we may not see heightened volatility as the COVID-19-related news potentially darkens, and this could cause short-term downdrafts in risk assets. But now is the time to focus on the longer term, where we do see meaningful recovery in corporate earnings.


Interest rates aren’t moving much. How can I get some income in my portfolio?

It is interesting to note that, despite some vaccine- and election-related excitement, interest rates have not budged much from where they started the month, with both the 10-year Treasury as well as the yield curve (the difference between 2-10-year Treasury yields) holding fairly steady. Bond investors understand well that the Fed will hold true to their word, keeping the fed funds rate anchored at zero for the next few years. At the same time, and despite some short-term boost in activity in mid-2021, the longer-term outlook for both growth and inflation remains subdued. We continue to believe that rates will be lower for even longer, which presents challenges for investors who seek yield.

We would offer the following guidance: First, high quality fixed income and cash will not produce meaningful income over the next few years; however, they do offer durable and valuable diversification benefits during market stress. That is important. The key here is to make sure that your cash/high quality bond portfolio is appropriately sized relative to your goals, your need for liquidity and your overall risk tolerance. These are Risk Control assets, and they are core to any investment strategy. Second, we think it is important to take a total return approach to portfolios versus overreliance on income. In a low-rate environment, relying too heavily on income can force investors to take risks that may not be apparent. Stretching for yield is not a good idea. Seeking yield should be done intentionally and with eyes wide open. And last, there are some areas offering relative yield advantages today that can be considered for inclusion in a diversified portfolio of risk assets. These include high yield bonds, dividend yielding stocks (combined with quality so as to avoid dividend traps), global listed infrastructure and even global real estate. These offer yields superior to investment grade fixed income, but investors must be aware that they are risk assets.


What impact do you see from the announcement yesterday that the Treasury will not renew some of the programs the Fed put into place, back in the springtime, to support the economy and market amid the crisis?

Well, they said it wouldn’t last, and it didn’t. The bromance between Federal Reserve Chair Jay Powell and Treasury Secretary Steven Mnuchin is officially over, with the Treasury Secretary serving notice to the Fed that several important emergency programs launched in the early days of the COVID-19 crisis to calm markets and drive economic recovery would not be renewed – and that the Treasury would like unspent capital to be returned to the Treasury. What this means in practice, according to our friends at Evercore ISI Research, is that the Fed must return all the undeployed risk capital allocated to these programs and their associated Special Purpose Vehicles and that, once capital is returned, any additional allocations to these programs will have to be authorized by Congress. So, it is not effectively “banked” at the Treasury to be used by the next Treasury Secretary at her/his discretion.

The amount in question is substantial, with nearly $455 billion in unused funding set to head back to the Treasury coffers. The programs in question were set to expire at the end of the year and include the Municipal Liquidity Facility for state and local governments, the Main Street Lending Program and two facilities aimed at supporting the corporate bond market. These programs, in aggregate, were not widely used; however, their being in place and available were seen as important potential support structures by the markets.

In a very unusual move, the Fed responded immediately with a public statement of disappointment. The markets had a decidedly muted reaction to this announcement, signaling that the Fed would likely work with the new Treasury Secretary, who will be named shortly by President-elect Joe Biden. All three of the leading candidates have deep roots at the Fed and will partner well with Chair Powell using the Exchange Stabilization Fund. It is important to note that this is a much smaller pool of capital that could be leveraged by the Fed and that more meaningful funds would require Congressional approval, which has proved a high hurdle.


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