Here’s the Case for Market Optimism, Built on a Virus Retreat

This is how we all hope the stock market, not to mention our virus-laden populace and economy, fares. It’s a nice scenario, sketched by Brad McMillan, CIO for Commonwealth Financial Network, in his latest research note.

“If current trends continue, we are through the worst of the pandemic and should see continued improvement,” he wrote. Good news on vaccinations, hospitalizations, and cases should hearten people’s confidence and, thus, the market, McMillan reasoned.

The economic picture gives signs of brightening, he said. Indicators showing medical improvement, a slow reopening of businesses, and the federal stimulus should improve employment and confidence, according to McMillan. He noted that job growth went positive again in January, after declining in December, and layoffs have been muted. “Confidence also seems to have bottomed,” he observed.

And the upshot is a tonic for stocks, McMillan noted with delight. Indeed, on Thursday, both the S&P 500 and Nasdaq closed at new record highs, as tech stocks outperformed. Since the stock market is a signal of confidence in the future, the market climbs are heartening.

McMillan pointed to the CBOE Volatility Index, or VIX, which, at 22, remains elevated as it has for the past 12 months of COVID-19. He found that this development is a positive thing. It “represents progress, as the pandemic is no longer the determinative factor” in the market, he declared. Investors expect a steady improvement in 2021, he said, and that has supported prices.

Adding to the optimism: Fourth-quarter earnings are coming in well ahead of expectations, and analysts are now adjusting their 2021 earnings estimates upward. This development, he said, “suggests this positive trend might continue, as well.”

To be sure, risks remain, McMillan said. Last weekend’s Super Bowl could trigger another round of infections. On top of that, there’s the advent of more contagious virus variants that could take root and accelerate infections again. “Here, too, we see no immediate signs of this, but evidence of these strains has now been reported in 35 states,” he noted. “So far, there has been limited spread, but this remains a very real risk.”

The upshot, in McMillan’s view, is that while infection growth is still too high, “the data suggest that we are through the worst of it.”

Over the next two weeks, he went on, there should be more encouraging medical news, as well as economic improvement as reopenings take place. “Markets will likely keep bouncing around on new developments, so expect more volatility in the short term,” he advised.

And over the next two months, with vaccines rolling out increasingly quickly, he said, “we should be approaching the end of the pandemic, when the economy can normalize and start to really grow again.”