Do We Need More Stimulus?

There’s a strong client consensus that the V-shaped recovery from the lockdown recession is on track, following months of pessimism. We don’t disagree, though such a consensus, coming as the S&P 500 equity risk premium is at new post-recession lows, probably means a short-term buyable dip is coming. Many think further recovery is contingent on more stimulus from Congress. We don’t expect any, but the resolution of the two Georgia Senate run-offs in January might change the dynamic of gridlock. But US households have accumulated $2.5 trillion in personal savings this year, unable or too cautious to spend the prior stimulus money. That’s a money-bomb of pent-up demand equal to 11.8% of GDP, and it will detonate next year when the “third wave” of Covid-19 tops out and 50 million inoculations with the new vaccine are administered through January. 2021 should complete the recovery and could embark on a boom as the world celebrates winning the war with the virus. A spending surge will trigger a transitory bump in inflation which will support higher Treasury yields. Near-term data is weak, driven by increased social distancing in the “third wave.” S&P 500 forward earnings are looking through that, with moderate upgrading even in the present quarter, validating that the virus experience will have created a lost year, but nothing worse. Looking ahead, forward EPS estimates suggest greater than 22% earnings growth next year.