Encouraging vaccine news has raised hopes for a quicker pace of economic recovery. Although some COVID-19-related restrictions have been reinstated around the globe, they may have less of an overall economic impact than the spring lockdowns. Bond yields have started to rise on expectations for a stronger economy in 2021.
U.S. stocks and economy: Vaccine news boosts optimism
With Election Day over—although vote counting continues in some states, and legal challenges have been filed—investor focus has shifted back to the COVID-19 virus. Fortunately, the latest news is very positive. Drug maker Pfizer recently announced that an early analysis has suggested its coronavirus vaccine, currently in human trials, is 90% effective.
This has raised hope for a quicker pace of economic recovery. If it happens, the faster growth would be building on a strong third quarter. Gross domestic product (GDP) gained 33.1% on an annualized quarter-over-quarter basis, the largest increase in post-war history, during Q3. Of course, the record gain was mainly because economic activity ground to a halt in the second quarter due to the coronavirus pandemic and related social-distancing restrictions. Even with the third-quarter surge, GDP has only reclaimed two-thirds of its pre-pandemic losses.
The October jobs report confirmed that payrolls are still increasing on a monthly basis—up 638,000 in the latest report—but the pace of growth has slowed. Similar to GDP, the level of payrolls still looks weak, as only a little more than half of the pre-pandemic losses have been recovered thus far. As you can see in the following chart, while temporary layoffs have been falling, permanent losses had been rising until recently. October’s reversal is a welcome sign, but not yet the start of a definitive trend.
Temporary layoffs have plunged from highs and permanent job losses have dipped slightly
Source: Charles Schwab, Bloomberg, as of 10/31/2020.
One of the worrisome components of the report was the increase in the duration of unemployment. The number of individuals without a job for at least 27 weeks jumped by 1.15 million to 3.56 million; and they now make up a third of the total number of those unemployed. Should that continue to climb or persist at high levels, many workers may find it increasingly difficult to find jobs in the future; and they are more likely to drop out of the labor force altogether (based on history).
Meanwhile, third-quarter earnings have improved markedly. You can see in the chart below that estimates back in July pointed to a -25% year-over-year decline. However, they’ve improved consistently and profits are now expected to shrink by only -7.8% (this combines already reported 3Q results with expectations for earnings yet to be released).
Q3 earnings expectations have improved since April and July
Source: Charles Schwab, I/B/E/S data from Refinitiv, as of 11/12/2020. April estimates not available for 2Q21. April and July estimates not available for 3Q21.
Undoubtedly, we remain in an earnings recession, and while the improvement this quarter is notable, many companies are still not providing detailed forward guidance to Wall Street’s analysts. Given the virus’ impact on companies’ operating decisions, its trajectory will continue to determine clarity (or lack thereof) moving forward.