Over the weekend, three pieces of good news occurred that should be quite beneficial to our portfolios over the next 12 months and hopefully sooner too. First, the Moderna vaccine was approved and will start to be used on Monday. This is another MRNA vaccine like the one from Pfizer, but it doesn’t require the same especially cold freezers, and it can be shipped in smaller volumes, making it a more accessible vaccine, particularly for smaller and more rural hospitals. Keep in mind that Covid-19 risks are exponentially higher for the elderly than for younger people. By focusing on the most at-risk, hopefully we should see the positive impacts flow through quite quickly.
The second piece of good news was that Congress FINALLY agreed to a stimulus bill. The $900 billion deal provides relief to small businesses, airlines, increases unemployment benefits, and provides a $600 payment to individuals that qualify. There are also other things of course, but those are likely the most relevant for the economy. With a Democrat President and House of Representatives, and we’ll see about the Senate, more stimulus is likely on the way down the road, but of course the best stimulus is reopening the economy when it happens.
The third piece of good news is that the Federal Reserve is going to allow banks to buy back stock again next year, after finding that they have more than enough capital to easily survive a dramatic stress test, far worse than what we are seeing now for the economy. This is absolutely huge, as the stocks are really cheap so these buybacks are enormously accretive, depending on the bank, but certainly the ones we own. This should help earnings per share growth and in many cases book value per share growth, which are the key metrics that guide valuations and stock prices for these companies.
I’ve written before about how a new accounting rule made banks front-load loan-loss reserves, to account for all projected future loan losses using dire projections. The credit situation has been dramatically better than what was anticipated and at recent conferences, the banks have been projecting that they will be able to release some of those reserves, which increases profits! Also, most banks did not include future stimulus in their projections, so this will be an added benefit.
One negative development came out of the UK though with their Coronavirus task force flagging a potentially more contagious strain, which has their government quite panicked, triggering harsher lockdowns. Now other countries are banning travel from the UK, which of course is not good for the already beleaguered travel and leisure industry. From my research on the subject, it is not uncommon or unexpected to see mutated strains as there have already been quite a few. Often they mutated to a more contagious strain, as the virus wants to reproduce as much as possible, but often that means less deadly since it spreads less if it kills its hosts. That isn’t the case for all, but certainly not something to panic too much about yet, and hopefully scientists will keep putting out more info on the subject.
All in all, I’m very optimistic on value stocks. These are things we’ve been waiting for and I expect mean reversion to be an immensely strong tailwind for us. I plan on writing again this week, but I’m wishing you all and Merry Christmas and Happy Holidays ahead of time too. None of us will forget this year and we are so blessed to have you as clients and friends. We will get through this and better times await!