A vaccine breakthrough and the promise of stable leadership in the US has sparked hope that 2021 could finally see the world turn the corner.
It’s been a tough year for good news, but that doesn’t mean it’s extinct. Consider the last few days alone.
A new administration is forming in the US, jolting optimism the next four years will banish much of the erratic and corrosive effects of Donald Trump’s presidency on trade, tariffs and international co-operation.
Pfizer and BioNTech announced what looks to be the first of perhaps three successful COVID-19 vaccines, prompting US infectious diseases expert Anthony Fauci to declare: “The cavalry is coming”.
“Help really is on the way,” he said of the potential for one of several emerging vaccines, which he thinks could be available to ordinary US citizens by April, May and June.
And finally – despite the extraordinary effects of the pandemic and US election – markets remain robust, sustained by ultra-stimulative central bank monetary policy, fiscal stimulus and signs of recovering demand for everything from housing, oil and energy to industrial metals such as copper.
In Australia, economic data this week showed strong rebounds in consumer sentiment and business confidence. Auction clearance rates have jumped and house prices are stabilising, defying predictions of big falls.
With state borders gradually coming down, the national cabinet met on Friday to discuss further domestic reopening by Christmas.
The possibility of an international travel bubble sometime next year with countries that have low virus case numbers, such as Japan, South Korea, Taiwan, Singapore and parts of China, is a very real prospect.
All of it fuelling a growing sense that 2021 could finally see the world turn the corner.
“This could be the mother of all economic recoveries, boosted by unprecedented policy support, once we’ve made it through what will still be a severe winter,” said Axi global markets strategist Stephen Innes. He believes by the second half of next year the “pandemic will be history in large parts of the world”.
Naturally, there are still as many things to fear as to cheer, if not more.
The vaccine may offer a false hope, given its safety and ability to be widely distributed are still untested questions. And in the meantime, COVID-19 cases are exploding across the northern hemisphere.
It's just too soon to assess with any confidence the implications of the news for the path of the economy, especially in the near term.
— Jerome Powell, Federal Reserve chairman
While European economies are reprising some of the draconian tactics of last spring to contain the spread, America is rudderless and struggling to muster the political will to address the resurgent crisis even as detection rates rise towards 150,000 per day – or 100 cases per minute.
“The next few months could be challenging,” Federal Reserve chairman Jerome Powell said this week, alongside his European Central Bank counterpart Christine Lagarde and the Bank of England’s Andrew Bailey, both of whom echoed the sentiment that it was too early to celebrate a potential vaccine-catalyst return to normal.
“From our standpoint it's just too soon to assess with any confidence the implications of the news for the path of the economy, especially in the near term,” Powell said.
Furthermore, Trump has – as of late this week – completely checked himself out of helping negotiate with Congress another round of emergency COVID-19 relief, throwing the burden on President-elect Biden and Senate majority leader Mitch McConnell.
So far the omens are not good. Democrats insist the package needs to be US$2.4 trillion ($3.3 trillion). McConnell is offering a much smaller deal of about $US500 million, arguing that improved economic signals, including a falling unemployment rate, lessens the need for huge spending.
“The level at which the economy is improving further underscores that we need to do something at about the amount that we put on the floor in September and October,” McConnell said on Thursday (Friday AEDT). Democratic leaders “still are looking at something dramatically larger. That’s not a place I think we’re willing to go,” he said.
Most are now coming to terms with the fact that genuine support for households and businesses hit by the growing wave of coronavirus will have to wait for relief until after Biden’s inauguration on January 20.
Another question mark is the degree to which Biden’s administration gets derailed by Trump’s wrecking of America’s electoral system and refusal to hand over power in an orderly transition.
The president continues to inflame supporters by spreading unproven claims of industrial-scale voter fraud and on Thursday took his anger out on Fox, which has arguably done more for his rise to the presidency than any other media network.
Even as more and more Republicans recognise Biden as America’s legitimate “President-elect” – the latest being Ohio governor and staunch Trump supporter Mike DeWine – Trump spent the week in sulky silence, refusing to concede and appearing in public only once, for Veterans Day on Wednesday.
That is despite being beaten by Biden in November 3’s election by more than five million votes nationally, and seemingly by the same Electoral College margin that Trump won over Hillary Clinton in 2016.
Markets too, could be under-playing the risks of an even larger political crisis in the US if Republican state legislators try to overturn this month’s election result by appointing their own electors to the Electoral College in defiance of voters. Another scenario would see a group of so-called “faithless electors” vote contrary to their state’s popular vote. In 2016 there were seven such voters, two of whom deserted Trump and five who turned on Clinton.
Technically and legally a long-shot – not to mention politically and morally – such manoeuvring is not only possible, it's also not unprecedented in American history. Constitutional experts have been pointing all week to the Electoral College dispute of 1876.
“The risks of a protracted process to confirmation of the election result remain and should not be ignored,” said Commonwealth Bank economist Joseph Capuro this week.
Finally, there is the ongoing problem of too much money sloshing around the global market in search of too few assets. Quantitative easing of various forms by the US Fed, ECB and most recently the Reserve Bank of Australia continue to distort market signals and fundamentals.
Famed British value investor Jeremy Grantham, founder of Boston-based GMO, warns against linking what’s happening with the vaccine to what markets think.
“Bubble mechanics actually have relatively little to do with economic realities,” he told CNBC on Thursday. “The bubble forms its own psychological node and we’ve seen that in the last few months … markets can go up on bad news and good news. It can interpret a Trump victory as bullish and then seamlessly interpret a Biden victory as bullish. These are the characteristics of a bubble and there’s not much you can throw at it.”
But none of that overrides the sense that the world is turning a corner.
A Biden administration will be resolutely centrist in orientation, regardless of what progressive Democrats like Alexandria Ocasio-Cortez and Bernie Sanders might demand. And a big reason for that is the congressional layout.
Democrats are probably not going to end up controlling the Senate, although that will only be known for certain once two run-off Senate elections are concluded in Georgia, in early January.
It’s fashionable to think that Biden, is inheriting a damaged economy that will take years to recover. The reality is quite the opposite.
— Professor Tim Duy, University of Oregon
The more likely scenario of split government will force both Democrats and Republicans to jettison hard-line doctrine in favour of compromise. Some of the most powerful figures in the next congress will be moderates, regardless of party affiliation, including West Virginia’s Joe Manchin, a Democrat, and Maine’s Susan Collins, a Republican.
Most have assumed this month’s election merely entrenched America’s divided and bitterly contested political differences. After all, Trump won at least 72.2 million votes – more than any American presidential candidate in history with the singular exception of Biden, who won 77.3 million.
But that doesn’t mean the coming two years will be a policy wasteland, according to a growing group of optimists. Many members of Congress will, furthermore, be under pressure to deliver real outcomes before they face voters in the 2022 midterm elections. And Biden can tell his left flank that there’s no pathway through Congress for more radical proposals such a green new deal, or bigger tax hikes.
Economists believe the pandemic and economic shutdowns will unleash a surge in demand once the shackles come off. Household balance sheets are still in good shape, unlike in the wake of the global financial crisis 12 years ago, and Millennials are just about to enter their prime homebuying years.
It’s fashionable to think that Biden, like his former boss Barack Obama, is inheriting a damaged economy that will take years to recover,” said Tim Duy, from the University of Oregon, this week.
“The reality is quite the opposite, with Biden stepping into a dream scenario for economic growth on the other side of the battle with the COVID-19 pandemic,” Professor Duy wrote.
That optimism might be even more justified in the case of Australia. In the wake of the positive vaccine news and improving economic outlook, Prime Minister Scott Morrison declared this week "we are well on the road to recovery" and spoke of the Australian "comeback".
He suggested the torrid events of 2020 would soon be in the rear-view mirror. "I am looking forward to a different environment next year," Morrison declared.
Sharemarkets are surging and there is an abundance of cheap money available, as central banks buy trillions of dollars of financial assets and pledge low interest rates for years to come. The surging liquidity is not only flowing into shares, but, once again, property markets.
Cashed up Australians – unable to travel overseas – who have managed to keep their jobs and avoid income losses are seizing on fixed home loan rates falling below 2 per cent to upgrade their homes in the COVID-19 work-from-home era.
The economy is already recovering faster than many people expected and the positive news on a likely vaccine by next year will bolster much-needed confidence, says PM Capital founder and chief investment officer Paul Moore.
"I suspect the economy is going to be stronger than people realise because there's all this pent-up demand and governments are spending like there is no tomorrow. The risk is it’s going to be too hot."
The country's biggest home lender, Commonwealth Bank of Australia, this week slashed the number of customers who required loan repayment deferrals, as people return to work and their businesses.
Commonwealth Bank economists on Friday upgraded the economic outlook, noting "there are genuine reasons to believe the domestic economic recovery is going to be strong over the next two years".
“An unprecedented level of fiscal and monetary policy stimulus, coupled with an expected drawdown in accumulated savings and the further easing of COVID‑related restrictions, will support economic growth and job creation,” CBA economist Gareth Aird said.
The bank tips the economy to shrink 3.3 per cent in 2020, followed by a rebound in GDP of 4.2 per cent in 2021 and 3.8 per cent in 2022.
There is huge pent-up demand for travel, tourism and mass events like concerts and sporting events. People are pining for that.
— Grant Wilson, Exante Data head of Asia Pacific
A big challenge remains the elevated unemployment rate, which the Treasury and the RBA expect to peak at about 8 per cent by year-end and decline only gradually thereafter.
What that means for the future direction of sharemarkets is unclear. The recent rally in stocks has already largely priced in a vaccine and a Senate-constrained Biden administration, which will have little power to raise taxes or heavily regulate big tech, energy and healthcare, says Grant Wilson, Exante Data's head of Asia-Pacific.
Central banks and interest rates will be pivotal to markets, Wilson says.
"We're very confident on the economic outlook, but if we do get the recovery next year and central banks pull back on the punchbowl, markets will be more complicated," Wilson says.
From a sharemarket perspective, Moore predicts a new 10-year rotation trend of money fleeing expensive high-growth technology stocks, which have been boosted by ultra low interest rates and lockdowns that forced people to embrace digital working from home.
"Now that we've got confidence on a vaccine, money will leak into value stocks where there is sensitivity to face-to-face activity, such as hotels, restaurants, casinos and even oil companies," Moore says.
Wilson agrees the vaccine optimism is credible and a potential "explosive" recovery awaits.
"There is huge pent-up demand for travel, tourism and mass events like concerts and sporting events, because people are pining for that. I think there is a relatively good shot that we will feel relatively normal by mid-year or Q3. From a GDP viewpoint it will probably look like a total 180 from the depths.”
Health Minister Greg Hunt says Australians could begin receiving vaccinations by March, though admits there is "more work to be done" on the four potential vaccines Australia is enrolled in.
Professor Terry Nolan, head of the vaccine and immunisation research group at the Doherty Institute, says the positive interim results on Pfizer's COVID-19 vaccine candidate signals that various other mRNA vaccines are likely to be successful.
"The likelihood of success of other vaccine candidates is high," Professor Nolan says. "But we still don't know for sure that it's going to be safe, so there are a few hurdles still to get through."
He is cautious on how quickly a vaccine can be rolled out at mass scale. If medical authorities evaluate that it is safe by the end of this year, a hierarchical roll-out to high priority recipients such as health and aged care workers could begin in the first quarter of 2021.
Producing billions of vaccines and distributing them to the wider global population could begin around the middle of the year.
"Working from home, social distancing and other public health controls are going to be with us well into the period when the vaccine is fully rolled out to a majority of the population," says Professor Nolan. "It's hard to see that happening much before the end of next year."
Investors, households and governments have been waiting a long time for good news, and disappointed by false dawns before. But that shouldn't blind people to the possibility that eventually there will be a turn for the better.