After hitting all-time highs on the back of positive COVID-19 vaccine news to start the week, U.S. stocks retreated as new lockdown measures were imposed in parts of the country to try and slow the recent surge in the virus. The S&P 500 finished down a little less than a percent for the week, while small cap and international stocks held up very well up about 2% and 1.5% respectively.
Over a quarter-million people have died of COVID-19 in the U.S., and new cases per day have hit a new record of 185,000. Hospitalization rates and daily deaths counts have also reached alarming levels. Meanwhile in Washington, tensions emerged between the U.S. Treasury and the Federal Reserve regarding the removal of some of the emergency lending facilities created by the CARES Act. Separately, after weeks of stalemate, party leaders at least appear to be trying to revive stimulus talks while also facing a potential government shutdown if certain spending measures are not passed.
S&P 500: 3,557.54 (-0.77%)
FTSE All-World ex-US (VEU): (+1.57%)
US 10 Year Treasury Yield: 0.83 (-0.05)
Gold: $1,873.71 (-0.84%)
EUR/USD: 1.1862 (+0.25%)
- Monday – U.S. stocks closed at record highs Monday after Moderna announced its COVID-19 vaccine was 94.5% effective in early results.
- Tuesday – Amazon announced a new offering called Amazon Pharmacy, which offers free home delivery of prescription drugs for U.S. Amazon Prime members.
- Tuesday – Shares of Tesla stock closed up over 2% after announcing the stock will be added to the S&P 500 index.
- Wednesday – Boeing’s 737 Max received clearance from the Federal Aviation Administration to fly passengers once again, lifting a ban that has lasted for almost two years.
- Thursday – Leaders in Washington met Thursday to discuss a $1.4 trillion government spending bill needed to avert a government shutdown after Dec. 11.
- Friday – Bitcoin continued its impressive move higher breaking above $18,500 Friday after starting the week in the $16,000 range.
Treasury Secretary Steven Mnuchin and Federal Reserve Chair Jerome Powell have worked together as a team to combat the economic fallout from the coronavirus throughout the pandemic. On Thursday Mnuchin sent Powell a letter declaring his intent to let certain emergency lending facilities expire on Dec. 31 and also requesting the Fed return around $200 billion of unused funds to the Treasury so that Congress could re-appropriate the funds. The Fed fired back quickly with only this statement: “The Federal Reserve would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.” This marks a notable divergence in the views of these two major economic leaders who had previously seemed to be largely in sync up to this point.
These emergency lending programs were not being heavily used, however at a minimum the availability of these funds instilled confidence that financial markets would remain stable. Removing these funds will be the first test to see if the market can begin to stand on its own. So far there has only been a muted reaction in credit markets with the consensus still believing the government would step back in if needed. Some have questioned political motives due to the timing of this move, but Mnuchin reaffirmed his plan was always for the programs to expire at year-end and that the funds should be allowed to be reappropriated by Congress for other relief measures.
It is hard to know what the right move is, as an argument could be made that the corporate debt market looks to be fine with junk-bond yields near a record low, but the municipal bond market looks more susceptible due to the pandemic’s heavier toll on their finances. With the transition of power approaching, if these funds were to be needed, the new administration would likely be significantly constrained in their ability to reinstate these programs quickly, which could reignite major market volatility. The coordination and cooperation of the Fed and Treasury have been the largest force supporting a vulnerable economy throughout the pandemic. So far the market seems to believe that recent vaccine developments provide the light at the end of the tunnel despite the virus at its worst point since the pandemic began, political turmoil, and tension between the Treasury and Fed.