January 22, 2021
Fiscal stimulus: JNJ efficacy data in the 80% range would further weigh on fiscal stimulus expectations that already appear challenged. Markets had assumed that Biden’s ~$1.9T stimulus proposal would be pared back to something closer to ~$900B with full passage likely by the end of February. Democrat leadership will try hard to avoid reconciliation, but that looks increasingly unlikely given the political backdrop, vaccine expectations and still strong US economic data. Without any further fiscal stimulus spending, the US budget deficit is already expected to reach a record ~33% of GDP in 2021. The prior record from 1943 (middle of WWII) was 26.9%. And equity-friendly policy tailwinds can quickly turn into headwinds if you’re not careful.
Bond yields: Most of the major equity corrections over the past two decades were caused by spiking bond yields. The 2013 taper tantrum immediately comes to mind and more recently the 2018 Fed messaging mistake when Powell announced its intention to increase interest rates “beyond neutral.” In both examples, bond yields crossed an identifiable technical threshold that led to increased selling of bonds (prices down/yields up) and increased volatility in equity markets. In the current environment, the technical threshold on 10-year yields looks like ~1.45%.