We expect the Federal Reserve to stay very dovish. Despite the promise of a better tomorrow with vaccines rapidly being deployed across the country, the Fed will continue to do everything possible to support financial markets. We expect them to err on the side of waiting too long to pull back on bond purchases and raising rates. During Powell’s press conference after the conclusion of their meeting on Wednesday, expect him to sound a cautious note on how extensive the distribution of a vaccine will need to be to have a meaningful impact on economic growth.
The investment strategy will continue to be to take advantage of steady positive revisions as to when vaccines will be approved, to the supply of vaccines available and the how swiftly they can be distributed. Whatever estimates exist to day will get improved next week just as they have been week after week. For example, we have yet to hear much about Johnson and Johnson’s vaccine that will likely be approved next quarter and have a bigger supply of doses than all of the vaccine providers that may get approval before them combined.
So be weary of a steeper yield curve and watch for TIP’s to outperform traditional treasuries as inflation will surge after a temporary stall due to recent lockdowns. Cyclical corporate bonds, especially those bond issues that don’t qualify for the Fed’s purchase programs, will continue to gather momentum regardless of a stimulus bill getting through Congress.