The year ends much as it began. For the stock market, is almost as if Covid-19 had not happened. Tech is in the ascendency. The FAANGs are threatening new highs. Political attempts to knock holes in the platform model are largely failing. The US has maintained a strong edged in semi-conductors, notwithstanding the successes of ASML, TSMC, and Samsung. China has failed so far in its bid to challenge US dominance in chip design.
Energy stocks remain under pressure. The Q4 rally should not disguise the fundamental challenge facing the oil majors and the network of exploration and service companies: their very existence is under threat by the collapsing cost of renewables. Tesla may not be a bubble after all. China has embraced the revolutionary EV manufacturer.
Of course, the stock market gains of 2020 would not have been possible without the dramatic decline in Treasury yields. The 10-year benchmark is edging higher, in anticipation of a return ‘to normality’ in 2021. But for the most part, the Fed has done a good job in supporting credit markets with ultra-low risk-free rates. There will be defaults – as the energy sector saw this year – but they will reflect micro, not macro trends.
Fed largesse has helped the housing market too, and this commentary looks at some of the recent numbers in more detail. Next year could see more of the same, as debt servicing costs for households remain at historic lows.
The big risks for 2021 are not macro, but administrative competence. A low vaccine rollout is a problem. President Trump has been right on a number of issues: his Operation Warp Speed produced spectacular results, and it was perhaps unlucky for him that the results of Moderna and BioNTech’s trials did not come a few weeks earlier.
