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Commentary & Insights


When Elephants Fly – January 2021

19 January 2021
photo of elephant floating on balloons
WCF Staff

“Well I seen a horse fly I seen a dragon fly
I seen a house fly
But I’ve been, done, seen about everything 
When I see a elephant fly”
—Dumbo; Disney Studios; 1941

As of today, Covid-19 has infected 87 million individuals. (1) The U.S., with 4.2% of the world population, has suffered almost 20% of all fatalities. (2), (6)

The Economic tab during 2020 includes:

  • A 30% collapse in real GDP during the 2nd Quarter (3)
  • An unemployment rate of 14% (the highest since 1939) (4)
  • The S & P 500 cratering 30% in five horrid weeks (5)

The damage and pain associated with school closures (impacting both learning and parenting), depression, and violence, cannot be measured. Though nearly one year into Covid-19, the U.S. is losing approximately 3,600 lives a day to the disease. (6)

Maybe Sting said it best, “Lest we forget how fragile we are.” (7)

Fragile? Perhaps, but also resilient. As the chart below indicates, the stock market rallied off the March nadir (circle on left), recovered (circle on right) and ultimately soared. (8) We’ve seen recessions, corrections, recoveries, and two of the nastiest bear markets in history. But now, we’ve seen everything; including the stock market mimic an elephant in flight.

stock market chart

What propelled that elephant? The evident catalyst, addressed in our note last quarter, was government intervention. The Federal Reserve Board expanded its balance sheet from $1 trillion to $7 trillion, dropped interest rates to near zero and purchased bonds in the open market. (9) Congress passed the CARES Act, applying an additional $2.2 trillion using a variety of re- lief strategies. (10) The combination, $8.2 trillion, dwarfs the annual economic output of Japan, the third-largest economy in the world. (11)

The more nuanced reason lies with the nature of the virus. It’s important to understand how it moves, how it ends and how society reacts.

Nature of the Virus

The Black Plague struck Europe in 1347 and wiped-out half of its population. (12) The Span- ish Flu of 1918 accounted for 39 million deaths, 550,000 in the U.S. (13) SARS-1 impacted only 33 individuals in the U.S. because it was so lethal that it killed victims before their illness could spread. (14)

Most of the damage from these pandemics occurred before the U.S. built massive wealth, advanced sanitation, clean water, safe food, modern medicine, and the Internet for sharing information. Yale professor and physician Nicholas A. Christakis refers to the U.S. as the “cumulative culture” (15) because we have access to all the science, art, and inventions that occurred before us. Humans are at the top of the food chain for several reasons, one of which is our unique ability to both teach and learn.

Ironically, the same evolutionary forces that brought scientific advancements also introduced globalization, air travel, mass migration, and dense populations, fostering the spread of Covid-19.

The End Game

Nonpharmaceutical interventions can drive cases to zero (Wuhan), but create a “false bottom.” Flattening the curve did provide the opportunity to study the virus, build up PPE inventories, figure out therapies, and initiate vaccine development.

Herd immunity occurs naturally (without vaccines) when a sufficient portion (maybe 60-80%) of the population develops antibodies from exposure. Christakis suggested this would occur by 2022, absent an effective vaccine. However, with only a 6% confirmed infection rate, reaching this milestone would entail considerable human suffering and pressure on an already over-taxed healthcare system.

Thus, the emphasis on vaccines. China sequenced the genetic code of the virus and shared it, all 29,903 letters, with the world (16) 60 days prior to WHO’s March 11, 2020 declaration of Covid-19 as an official epidemic. (17) Moderna took a mere 42 days to deploy that sequencing data into the first vaccine trial. (18) Today there are 53 different vaccines being explored and three already approved. (19) Johnson and Johnson could have their vaccine on the market as soon as February. (20)

To summarize, Covid-19 ravaged the global economy, stirring governments to respond with all available tools, generating vast liquidity and historically low interest rates. Return-seeking capital gravitated out of bonds and into equities. Stocks are forward-looking assets. Confidence that the virus will soon dissipate has buoyed stock investors.


Where are we heading? The answer depends on three powerful forces: economic growth and Fed policies, both on a collision course with valuation.

Current projections for GDP growth exceed 5.0% in 2021 (the best since 1984). (21) The optimistic forecast is supported by:

  • The virus does not have to be 100% eradicated for businesses to gradually reopen.
  • “On December 11, the same day that Pfizer’s vaccine was approved for use by the FDA, the number of bookings made across Marriott’s, Intercontinental Hotel Group’s, Kayak’s, and Priceline’s websites—among those of many other well-known industry names—took a sudden and sharp turn upwards”. (22)
  • Many of the unemployed can be put back to work rapidly considering the expected return of travel and leisure activities.
  • When the U.S. stopped spending, it started saving. (23) The near 13% savings rate compares to historical averages closer to 7% and provides ample resources to support deferred consumption.
  • Though political changes introduce the risk of rising income tax rates, investors believe that would be offset by more normalized trade policies.
  • Christakis uses the Roaring Twenties as a guide for societal behavior that followed the 1918 Spanish Flu. He anticipates a “relentless pursuit of social activity,” such as sporting events and concerts, a return to cities, increased innovation, and a joie de vivre after Covid-19 is in the rear-view mirror. (24)

personal savings rate chart

Though strong economic growth is typically associated with tighter monetary policy, the Federal Reserve Board has explicitly stated their intention to keep short term rates near zero for an additional three years. (25)

Not only is the economy poised to grow and interest rates to remain low, but productivity (output per hour worked) has surged due to increased use of technology. (26) This translates directly into higher operating margins and thus, higher profits.

Can we quantify that good news? Consensus earnings for the S & P 500 stocks are about $167 in 2021. (27) The index closed out 2020 at 3756, translating into a price to earnings ratio of 22.5 based on forward earnings. As seen in the chart below, this valuation is approaching the peaks last seen during the era. (28)

S&P 500 P/E Ratios

Many observers will suggest that the preponderance of good news is no secret…that the elephant is in flight.

Fortunately, both the 2020 returns and the valuation of the S & P 500 largely reflect a handful of technology stocks. The “other 495 stocks” were up by just 3% in 2020, leaving ample room for further advancement. (29)

Bonds offer a ballast for the innate volatility of equities and provide some cash flow, but generally fail to keep pace with inflation today.

Though inflation expectations have risen off the summer 2020 lows, they remain at about 2%, almost identical to the summer of 2019 level. (30)

“What’s true of all the evils in the world is true of the plague as well. It helps men to rise above themselves.” (31) Let’s hope so, as we close out the most challenging year of a generation.

  1. Johns Hopkins University;  January 6, 2021
  2. U.S. Population 330 million vs. World Population 7.73 billion; United States Census as of January 7, 2021.
  3. Bureau of Economic Analysis; December 22, 2020
  4. Unemployment rate rises to record high 14.7 percent in April 2020; U.S. Bureau of Labor Statistics. May 13, 2020
  5. Both small stocks (Russell 2000) and Foreign Stocks (MSEAFE) performed worse than the S & P 500 for the period.
  6. As of January 6, 2021, U.S. deaths (361,063) vs. global deaths (1,882,051) Johns Hopkins University.
  7. Sting, “Fragile” Nothing like the Sun, 1987
  8. and West Coast Financial.
  9. Federal Reserve Bank of St. Louis;
  10. “The CARES Act Has Passed: Here Are The Highlights.” Forbes; March 29, 2020
  11. Japan’s GDP was $4.7 trillion in 2020 according to Trading-
  12. Apollo’s Arrow; Nicholas A. Christakis; October 2020
  13. “Why Was It Called the ‘Spanish Flu?”; March 27, 2020
  14. Centers for Disease Control.
  15. Apollo’s Arrow; Nicholas A. Christakis; October 2020
  16. “China releases genetic data on new coronavirus.” Center for Disease Research and Policy; University of Minnesota. January 11, 2020
  17. “Coronavirus: COVID-19 Is Now Officially A Pandemic, WHO Says.” NPR; March 11, 2020
  18. “Cambridge biotech Moderna leads in the race for a coronavirus vaccine.” The Boston Globe; February 28, 2020
  19. COVID-19 vaccine tracker; Regulatory Affairs Professional Society; posted January 7, 2021
  20. “What’s Happening With Johnson & Johnson’s Covid-19 Vaccine?”  Forbes; January 7, 2021
  21. “U.S. Resilient.” Goldman Sachs report; January 7, 2021. “2021 Could Be (a Lot) Better Than You Think.” Wall St. Journal; December 24, 2020
  22. “Hotel Bookings Spike on Positive Vaccine News.” Bloomberg; December 11, 2020
  23. Federal Reserve Bank of St. Louis;
  24. Apollo’s Arrow; Nicholas A. Christakis; October 2020.
  25. “Boom Should Follow a Tough Winter.”  Wall St. Journal; January 4, 2021
  26. Bureau of Labor Statistics;
  27. Standard & Poor’s
  28. YRI S&P 500 Earnings Forecast. Yardeni Research, Inc. January 4, 2021
  29. Liz Ann Sonders; Barron’s; December 30, 2020