A vaccine set a healthy foundation for Monday’s rally, but it won’t immunize the market from volatility. Gains were solid but not steady last week, with the S&P 500 rising 2.2% in see-saw fashion. The improved prospects for a vaccine establish a bit of a safety net under the market, but they won’t prevent spells of weakness.
The spike in new COVID-19 cases and hospitalizations will likely be the key instigator of market swings in the weeks ahead. The strong rally in U.S. stocks since midsummer has been driven by progress in reopening the economy. The surge in infections stunts that progress, with several areas, including Chicago and New York, imposing tighter restrictions to mitigate the spread. We’ll probably NOT return to the lockdown measures of earlier this year, but the pace of the rebound in economic activity is likely to stall somewhat in the coming months. Market sentiment will oscillate between vaccine optimism and near-term infection and reopening concerns.
The decade has not had the kind of start many expected or hoped for. However, the latest data signals the pillars of the recovery remain intact. Initial jobless claims last week fell to 709,000, the fourth consecutive weekly decline and the lowest reading since the pandemic began. This signals the continued healing of the labor market, which will be one of the most influential drivers of the sustained economic recovery. We could see the pace of improvement in hiring stall somewhat due to the recent surge in virus cases, but expect unemployment to decline further in 2021, supporting household consumption and an enduring economic expansion. More positive news, third-quarter corporate earnings came in ahead of expectations, with more than 80% of companies beating estimates by an average of 17%. There are signs that better days are coming.