Covid-19 and the Day After
Covid-19 and the Day After
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Author : Rachel Poole
Date : February 11, 2021
Here is our take on the articles summarized below:
As recovery efforts around the globe begin to gain traction, policymakers and economists are looking for what the future holds. In our first reviewed article, we examine how the dangers of the coronavirus pandemic are still very real even during a global vaccine distribution. The second article deals with financial assets’ sky-high valuations amid the worst recession in a decade. The final two articles look at how President Biden’s proposed stimulus package may help the broader economy recover from the pandemic. These all point to a general optimism for a recovery by year’s end, but as investors we must be careful not to trust too deeply in consensus. There is still much that could go wrong, especially in an environment of inflated valuations and general volatility. Still, should we prudently navigate these treacherous waters, there remains a good deal of hope for a near end to this past several months of trials.
Coronavirus mutations add urgency to vaccination effort as experts warn of long battle ahead
Joel Achenbach and Ariana Eunjung Cha, Washington Post
The emergence of several Covid-19 variants is complicating the pandemic recovery effort. Three of the most discussed variants, first identified in the United Kingdom, South Africa, and Brazil, have already made their way to the US. Though research has found that vaccines will most likely work against mutations of the virus, they may not work as well. Furthermore, some of the variants are “eluding natural immunity” and reinfecting people who had previously recovered from the more common Covid-19 strain. The variants are posing a major challenge to achieving herd immunity, particularly in the US where recent polls suggest that more than a third of the population is unsure about getting the vaccine or is firmly against it. However, the greater number of vaccinated people, the lesser the playing field for the virus to replicate and mutate.
Early in the pandemic, scientists suggested that about 70 percent of people would need to be vaccinated or develop natural immunity to reach herd immunity. If a more transmissible variant dominates infections, the necessary coverage could become more like 80 or 85 percent. Scientists have been warning world leaders that the urgency of vaccination applies to everyone on the planet and that vaccine nationalism is a very real problem. As we have already seen, a variant that pops up in one location is likely to spread everywhere. Getting back to “normal” is not achievable if the underserved communities of the world are not receiving vaccines. Furthermore, if people continue to be irresponsible, letting their guard down on social distancing measures, more transmissible variants could rampantly spread across the globe and create the need to completely redesign vaccines.
Rising Inflation Will Force the Fed’s Hand
Richard Cookson, Bloomberg
With valuations on nearly every financial asset approaching bubble territory, the Fed will have its work cut out for it to prevent a collapse. Of little help is the fact that the Fed may have created this bubble in the first place through record-low interest rates and a greatly expanded balance sheet. Consumer inflation has risen and is likely to continue growing, while the Fed is unlikely to move quickly to rein it in. Bond yields on both sovereign and corporate debt are at record lows, making safe havens a rarer find than in previous financial crises. The markets are likely to react to a crisis much more quickly than the central bank, which puts the Fed in a bind: move too slowly, and the political fallout will be enormous as consumers face a squeeze; too quickly, and the markets will be spooked. To find a safe way forward will require an overhaul of monetary policy; Treasury Secretary Janet Yellen and the central bankers will have their work cut out for them.
The Biden Stimulus vs. the Bond Market
Mike Bird, Wall Street Journal
With President Biden’s proposed $1.9 trillion stimulus package at the front of many investors’ minds, some prominent economists have pointed to inflation concerns, saying the stimulus could “overheat the economy.” The bond market though may also be considering a different view: rising bond yields indicate a recovery from the coronavirus-depressed levels last July. If the stimulus bears are correct, then a restoration of long-term T-bond yields back to 2010 levels would create a once-in-a-generation reckoning for both domestic and international debt. Such an act could have exchange rate implications around the world. On the other hand, predictions of an inflationary upswing in recent years have not materialized, leading some to wonder whether the current landscape would allow another decade of rampant inflation at all. If this is the case, as the bond market seems to expect, economists may have to reconstruct the entire framework of how price pressures operate in the modern markets.
What effect will Biden stimulus plans have on Fed policy?
Financial Times
Investors have been largely looking past the US economic recession and growth challenges and are instead, focusing on President Biden’s $1.9 trillion stimulus package. The prospect of more fiscal aid has caused economists to increase their forecasts for economic growth. For example, Goldman Sachs now believes US GDP will grow by 6.6 percent this year and that the unemployment rate will drop down by 2 percentage points to about 4.5 percent by the end of the year. The US Federal Reserve has signaled that it will keep its ultra-accommodative monetary policy in place and will not start scaling back its large asset purchasing program until 2022, encouraging investors of stable market conditions.
Across the pond, sterling has had a good start to 2021, but analysts are wary that the United Kingdom’s new trade relationship with the European Union may be a headwind for the currency. Across Europe, equities have been supported by stimulus programs from governments and central banks, and the rollout of coronavirus vaccines. Analysts believe European equities will continue to rise in the coming months as companies recover from the pandemic.
