COVID-19: Where We Are and What Comes Next

COVID-19, BMO hosted a panel with in-house and external experts to discuss the implications from a health, markets and macroeconomic perspective, including where we are now, when a new normal might begin, and what it will look like. The panel was moderated by Chief Investment Strategist Brian Belski, and featured medical commentary from Dr. John Whyte, Chief Medical Officer, WebMD, and Dr. Allison McGeer, Senior Clinician-Scientist, Lunenfeld-Tanenbaum Research Institute, Sinai Health. BMO experts, Deputy Chief Economist Michael Gregory and Margaret Kerins, Head of FICC Macro Strategy, discussed the economic and fixed income and equity market outlook for Canada and the United States.

Listen to full discussion.

TRANSCRIPT

BMO COVID-19 Insights podcast is live on all major channels including Apple, Google and Spotify.

Game Changer

Opening the call were our guest medical experts, who lauded the global response to develop and start rolling out a vaccine in record time, marking a light at the end of the tunnel after nearly 10 months of pandemic in Canada and the United States.

The U.S. FDA authorized the Pfizer BioNTech vaccine on Friday, declaring it safe to use and 95% effective. Canada, the UK and certain Middle Eastern countries had already authorized it, but the first doses were administered on Monday in both the United States and Canada.

“This really is a game changer in our desire to crush COVID-19,” Dr. John Whyte told the call as authorities began deploying the vaccine on both sides of the border. “It's going to be several months before we really see the impact of wide-scale immunization, but it really is a light at the end of the tunnel.”

Vaccine Rollout

Currently, there are 2.9 million doses of the vaccine in the U.S., with an expected 25 million doses due by the end of December, and 100 million doses by March or April. Because this is a two-dose vaccine, that means 50 million people should be vaccinated by that point.

In Canada, there will be 294,000 doses by the end of December, Dr. Allison McGeer told the call, a figure that represents about the same rate of doses per capita as the United States. Canadian health authorities expect to have around 6.4 million vaccine doses by the end of March, enough to vaccinate the country’s first high priority group.

In the U.S., the CDC has recommended long-term care workers be the first to receive vaccinations; however, it will be up to state and local jurisdictions to make the final call. In Canada, the priority varies by province–in Ontario, long-term care workers and residents are the focus, whereas, in Alberta, acute care workers are the priority.

While the Pfizer BioNTech vaccine has led vaccine news, Dr. Whyte noted that, later this week, the FDA will be reviewing the Moderna vaccine for emergency use approval. 

The Tunnel Before the Light

Medical experts advised, however, that a vaccine rollout does not mark the end of the fight against COVID-19, saying that the holiday season will be a critical time to keep the spread of infection in check.

“I want to spend just a minute talking about the tunnel before we get to the light at the end,” said Dr. McGeer, a leading Canadian infectious disease specialist. “Because one of the things we need to be really careful about in the next three months is that we don't get so excited about the vaccine that we lose control of the pandemic in between.”

“All of us are living in fear that, over the holiday time, people will just not be able to bear to maintain social distancing, and that the consequence of that is that we'll start to see cases increase,” just as vaccines roll out.

THE ECONOMY - Critical Winter Hump

BMO Capital Markets Deputy Chief Economist Michael Gregory said economic prospects are brightening with vaccine developments, but as restrictions continue to build in sync with rising infections in Canada and the United States, economic growth will continue to be impacted.

“It’s great news that we have developed and are distributing a vaccine much more quickly than believed to be the case several months ago, and I think most people are looking at the prospects for the economy on both sides of the border and saying for the second half of next year and in 2022, that those prospects are brightening,” he said. “Unfortunately, we have to get from here to there, and where we are here is with infection rates rising and as a result we are seeing provinces and states increasing their restrictions.”

Gregory said government policy will be critical to getting the Canadian and U.S. economies over what he described as the COVID winter hump, to ensure they have adequate support in the months ahead as they roll out vaccines across populations in both countries. He pointed with optimism to Washington and a $908 billion bipartisan bill that could extend support to areas like unemployment insurance, and extend the moratoriums on evictions and forbearance programs for student loans and mortgages.

“We do think we will get that support, but it is critically important that we do get it to get us over this hump,” he said.

Slowing Growth

Gregory forecast slower economic growth, in the interim, however, in both Canada and the United States, as businesses navigate rising infections and resulting restrictions. 

In Canada, Gregory said the strong growth levels from the third quarter will peter out as we turn the year, and even experience a slight contraction on a month-to-month basis, although not to the same extent as in the Spring. 

“Let's put it this way, we had growth of slightly more than a 40% annualized rate in the third quarter …  We think we'll probably be down about two and a half percent for the full fourth quarter, and that includes a little bit of monthly contraction,” he said.

In the United States, where there was a 33% expansion in the third quarter, Gregory expects that the slowdown as a result of the second wave of COVID will come later than it did in Canada because restrictions began later. He forecast about 5 percent growth for the U.S. economy in the fourth quarter, with a steeper slowdown in the first quarter, when it will slip to a 1% growth rate.

He said the economic impact of the second wave of the pandemic would likely be mitigated amid more targeted lockdowns and because businesses have become more accustomed to operating under COVID protocols.

“I do think that the hit to business and consumer confidence from the second wave will be much more dampened than was the case in the first wave,” he said. “We do think that what these restrictions will do is dent the recovery, but they're not going to derail it.” 

FICC - Record Low Credit Spreads

Looking to fixed income, BMO Capital Markets Head of FICC Macro Strategy Margaret Kerins said that, given the backdrop of extreme monetary and fiscal stimulus, she expects 10-year Treasury yields, and Treasury yields in general, to remain range bound.

“In Treasury rates, we do think that we could possibly reach the lows of 2020 in that 50 to 60 basis point range, and also make a run toward the 1% to 1.25 range,” she said, adding that better buying will emerge if we make a run towards the 1% to 1.25 range, because rates are low globally. “We've got a global environment of fiscal and monetary stimulus and U.S. rates are still relatively attractive.”

Kerins said credit spreads will reach for “all time tights”, supported by a very accommodative Fed and Treasury market, and a reach-for-yield environment, despite the outlook for shutdowns to slow economic growth in the first quarter.

“While that normally would be credit-spread-negative, we think the market looks past that and continues on the liquidity- and reach-for-yield binge that's been occurring,” she said.

Inflation Stem
Despite the amount of monetary and fiscal stimulus that has occurred or will continue to occur in coming months, Kerins predicted there will be no meaningful, sustainable uptick in inflation in 2021, due to the depressed state of employment, but that is not to say that the Treasury market won’t attempt to price rising inflation.

“We think that the Fed will be bound by that feedback loop where, if we get any real pricing of inflation, the equity market sells off, financial conditions tighten and the Fed again has to step in and increase some sort of accommodation,” she said. “In addition to that, we completely retain our conviction that the long-term demographics, technology and globalization that are still occurring in the marketplace will suppress long-run inflation.”

With respect to markets pricing in potential tapering, Kerins expects the Fed to remain accommodative over the coming year, keeping financial conditions steady. 

“The Fed has learned their tapering lesson from the prior crisis, and we don't think they're going to go down that path next year at all,” she said. “More likely they will remain extraordinarily accommodative with an open door, and that should keep financial conditions pretty steady.”

MARKETS 3 Cs- From Chaos to Coexist to Cure

BMO Capital Markets Chief Investment Strategist Brian Belski said the next three to five years would be characterized by good old-fashioned stock picking as the Canadian and U.S. economies recover from the pandemic.

Having moved from the early chaos of COVID-19, Belski said the second half of the 20-year bull run began on March 23rd, when markets touched a low and began to rebound from the initial impact of the global pandemic.

That’s when markets hit CTRL-ALT-DEL, reset, he said, and the world moved on to learn to coexist with the virus. 

“And now we've moved into the cure phase, and what we're going to do next with respect to investing. If 2020 taught us anything, it's that it’s not going to be as easy as the market is expecting,” he told the call. “It's not going to be as easy as buying this stock or this industry, or this sector.”

Instead, said Belski, the next 10 years of the bull run will see a return to “good old-fashioned fundamentals”, with an emphasis especially in the next three to five years on growth in U.S. and Canadian-listed companies.

He said that for the U.S., his team has a 4,200 target for the S&P 500, forecasting 35% earnings growth and double-digit upside in terms of prices from current levels.

“We favor financials stocks, discretionary stocks and industrial stocks for the next 12 months, but over the next three to five years, we remain overweight from a longer term secular position, technology companies, communication services companies from a sector basis, and select healthcare and consumer discretionary.”

He described Canada as a source of undiscovered value and, on a short-term basis at least, predicted Canada will surpass the U.S. in terms of performance. His forecast is for Canada’s TSX Index to reach 19,500 in 2021.

“Our theme for several years has been, ‘as America goes, so goes Canada,’ and the strong cross border relationship with respect to trade and fundamentals, we believe, is only going to get stronger.”