Nothing happens in a straight line. We need to remember this. The path from laboratory to broad immunization is one example: There will be plenty of bumps and bruises along the way. In the meantime, data related to cases are certainly raising eyebrows.

US Confirmed Cases & Deaths
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Winter Is Here
Europe was seeing signs of rolling over from a mobility standpoint – and mobility and economic activity are highly correlated. Importantly, the reintroduction of new lockdown measures in Germany, Spain, Italy, and France in October appears to be resulting in a decrease of average new cases as of mid-November. While this suggests Europe may be turning a corner, the US is not there.

As of November 18, Covid-19 cases are increasing in all 50 states, which is likely to translate into near-term headwinds. On an absolute basis, hospitalizations are now higher than they were earlier in the year. It is also important to note that while earlier outbreaks were concentrated within specific cities or regions of a handful of states, the current surge is more widespread. While this may seem concerning at first glance, increased dispersion helps to reduce the strain on individual healthcare systems. Although some hospital systems are again running into capacity constraints, capacity remains available more broadly. As we have stressed throughout the crisis, it is healthcare capacity and not case counts that remains the key.

As cases continue to rise, much ire has been placed on legislators and their inability to extend and expand pandemic fiscal aid. Partisan foot-dragging around the transition between the Trump and Biden administrations is certainly adding to fears of a dark winter ahead.

Market Implications
Despite these dire Covid-19 headlines in the US, stocks have held in quite well. Why? For starters, many of these fears are well known and have been expected for months. Fears of a tough winter have been grabbing headlines for months – so this is neither a new development nor an unexpected one.

Furthermore, lockdowns similar to those that occurred in March/April are widely believed to be a low probability event. Instead we expect – and are already seeing – more targeted and flexible measures. While the term “lockdown” may still be used, the practices being put in place now are very different from the actions taken earlier in the year. Meanwhile, fatality rates remain well below levels from earlier numbers. As cases have risen exponentially in recent weeks, deaths have continued to remain in check – even when accounting for the expected lag between cases and deaths. This is in large part due to the massive strides healthcare professionals have made over the past nine months to evolve treatment and improve patient outcomes. While headlines remain alarming, we continue to believe that the human “reaction function” is key – individual behavior will change as a result of worsening Covid-19 trends and the numbers will eventually crest as complacency wanes and adherence to mask usage and social distancing is strengthened.

Great News on Vaccines
Perhaps most importantly for investors, the market is looking past all of this to vaccines. Mid-November has brought a series of unexpectedly good news around vaccine development and trial efficacy with reported results far above initial expectations. Again, production and distribution will not be a straight line – but there is now a light at the end of the tunnel and that helps to provide clarity.

Uncertainty is the enemy of markets – it reduces risk appetite for investors and business leaders alike. But as 2020 has dragged on, we’ve learned to live and work in a Covid-19 world. The exact path forward toward the light at the end of the tunnel remains unclear, but businesses and consumers know now how to operate in this environment. From a stock market perspective, we believe this is critically important and very underappreciated. Companies are now well-prepared to forge ahead and adapt, which will help them weather the bumpy road ahead.

Fiscal cliff concerns remain, though we continue to believe these fears are overstated due to the powerful effect of the CARES Act and the savings cushion that has been built. This provides an important buffer, but it can’t last forever – additional fiscal support will be needed. Should the US economy accelerate significantly to the downside through the winter months, Congress will likely be forced to put forward some kind of fiscal bill.

Reasons for Optimism
The human toll of the pandemic cannot be overstated – nor can the importance of continuing to adhere to social distancing measures, mask-wearing policies, and sanitization procedures over the months ahead. While distribution is likely to occur in fits and starts, and widespread uptake will face challenges, the scientific community should be applauded for having developed viable Covid-19 vaccines in record time. The recovery is heading in the right direction, and there is at last a viable exit ramp leading out of the pandemic crisis. Signals for strengthening business activity in the year ahead include the need to restock near-historically low merchant wholesaler inventories, improved consumer confidence, and a robust US housing market. While the winter months and increasing contagion are likely to remain a top concern to investors, there are many reasons to believe markets are more willing to look through the short-term pain to what look to be more promising days ahead. Investors may want to prepare for a bumpy winter ride, as the market grapples with a classic tug-of-war dynamic between potential short-term pain and potential long-term gains.

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