Q4 2020 Vaccine Day

Wernau Asset Management Clients,

Today was a historic day in the battle against COVID-19 as the first post-clinical trial person, 90 year-old Margaret Keenan, received the Pfizer vaccine at University Hospital in Coventry, England. The United States FDA meets tomorrow and Thursday and is expected to approve the vaccine for emergency use with doses administered as early as next Monday, according to reports. Earlier today, the FDA staff report released its findings, which confirmed the historic efficacy of the vaccine resulting in what one analyst termed a "gleeful" response from experts. The briefing document may be found here: Vaccines and Related Biological Products Advisory Committee December 10, 2020 Meeting Briefing Document- FDA.

Indeed, today's news is balanced by horrendous virus and hospitalization numbers in the U.S. You can track COVID data here: The COVID Tracking Project | The COVID Tracking Project. Rollbacks of re-openings are happening in impacted areas, though at present not as severe as previous shelter in place and stay at home orders. Today, the Commonwealth of Massachusetts rolled back to Phase 3 Step 1 for all communities which has the impact of closing some venues, reducing restaurant capacity and strengthening mask orders in the workplace among other restrictions. Notably, schools have not been ordered closed nor has indoor dining at restaurants at this time (although capacity is now limited to 40%).

With the vaccine now in play, rotation in the stock market continues into value stocks and traditional economy names. The markets are forward looking and are therefore trying to price in the post pandemic world. Thus, we have seen a rally to record highs on many indices. Large cap domestic tech has led the best gains in the market YTD. That noted, it makes sense that stocks which will benefit from the reopening have now caught a bid to reflect what operations might look like in the post-pandemic world. While timing of that world remains uncertain, many experts think that we will see a marked increase in the vaccinated by late Q2 2021.

We expect economic activity to build on itself after an initial decline in the next two months from virus related shutdowns. Once vaccinations become more widespread in Q1 and Q2, we expect a steady build of "normal" economic activity to begin in earnest. This should occur simultaneously with the abatement of the current virus surge leading to a gradual lifting of restrictions, further amplifying growth. It seems clear we will see a massive year over year increase in GDP in Q2 2021 versus the abysmal Q2 2020. In addition, we expect profits to rise as many corporations will enjoy revenue increases on a lower cost base due to cuts made throughout the past year.

Market valuations reflect a multiple of these earnings. Consensus estimates, according to Factset, currently call for S&P 500 earnings to be around $170/share. This estimate puts the current market at about 22 times earnings. This valuation level is at the high end of a normative range, but nowhere near the dotcom bubble level P/E ratio. If consensus is too conservative, as it typically is when coming out of a recession, we may see more amplified earnings in 2021 making today's market value seem more palatable. Indeed, our current forecast for 2021 year-end S&P 500 value is a range of 3,740 at the low end to 4,144 at the high end. This projection assumes the current multiple of 22 times an earnings range of $170-$185 for 2021 S&P 500 earnings. The higher multiple is appropriate given the suppression of interest rates and likely additional fiscal and Fed support throughout 2021. The current level of the S&P 500 is 3,702.

In 1944, Dwight D. Eisenhower addressed invading D-Day troops saying, "You are about to embark upon the Great Crusade, toward which we have striven these many months. The eyes of the world are upon you". While not the same type of foe, COVID-19 has taken many of our fellow citizens in a raging fight. Our health care workers, scientists and clinical trial volunteers have shouldered this fight alongside the shared sacrifices borne by the people of the world. Now our health care workers will be able to fight back with a powerful weapon. That fight will not take days, weeks or even a few months, but we are heartened to know they will very likely now win the war.

Sincerely,

Peter C. Wernau

President, CEO
Wernau Asset Management

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