The equity markets surged this week after Pfizer announced a high efficacy rate for its Covid-19 vaccine. Bond yields steepened in what some are saying is a welcomed sign of an improving world. However, the virus is surging and while there are long-term solutions coming into focus on how to treat this virus, the developed nations could be in for a very tough winter. These beliefs were echoed by the Fed as well. With the presidential race looking settled, the focus should resume on how to help mainstream. Business owners in certain segments need the financial help to bridge the gap from shutdown to full re-opening and that help can only come from fiscal stimulus. We hope it does as the country has so many wonderful entrepreneurs that are taking the brunt of this pandemic induced recession.
Some positives for the economy include a slowdown in unemployment claims, albeit at a slower pace, some improvements in manufacturing data, and an unbelievability strong housing market. However, consumer sentiment fell, probably due to the combination of a very tense political environment during the pandemic. Also, creating some concerns are threats of statewide or national shutdowns. There are varying opinions on whether a full shutdown is advisable. We think that full lockdowns create more harm than good.
While house prices appreciate across the country, the commercial sector will see some real challenges as tenant and landlord lease negotiations and workouts begin. Cap rates will need to move higher to attract investment as technology has disrupted the manner in which many of us work. The flexibility to be able to work from home and go into the office on a less rigid schedule will be a boon for housing for some time, especially in more affordable suburban areas. A move lower in interest rates from 4% to 2.75% increases affordability greatly. Borrowers’ affordability opens up more housing options, especially outside of crowded urban areas. Low interest rates also allow borrowers to recapitalize their balance sheets by lowering interest payments and freeing up money for other purchases. This will set up nicely for when a post-Covid world emerges as vaccines become widespread, treatment improves, and cases taper off.