It is quite clear that as COVID-19 goes, so goes economic activity, which leads political response and tests the remarkable ability of people to adapt.

The path of the virus over the past few months is evident when examining what is surprisingly fairly solid economic data. Fourth quarter GDP grew 4%, capping a year that saw GDP fall 3.5% as large sectors of the economy, particularly travel and hospitality, were off limits to consumers. After COVID-19 case counts declined during the summer, a resurgence of the virus in the late fall and through the holidays spurred the reimposition of stay-at-home orders and retail closures for restaurants, gyms, and other gathering places. With less opportunity to move about, consumers still boosted their spending a respectable 2.5%, but this was short of what economists expected during the critical holiday season.

 The employment market, a lagging indicator of activity, saw weakness to start the year as employers added only 49,000 jobs in January. Further, December’s previously reported job loss of 140,000 was revised down another 87,000 for a total decline of 227,000. The path of the virus is again evident as the leisure and hospitality sector shed 61,000 jobs in January and a whopping 536,000 in December. Even so, the unemployment rate in January declined to 6.3% from 6.7%; the virus also impacted this statistic as the decline was due to a lower percentage of workers in the labor force for various reasons, such as fear of contracting the virus and/or increased child-care responsibilities for students learning at home.
 
Very recently the path of the virus has taken a turn in the right direction. After positive COVID-19 test cases peaked at over 300,000 on January 7th, positive cases have declined sharply to a mid-February rate of around 65,000 per day. The decline can likely be explained by a variety of factors such as fewer post-holiday gatherings, the increasing numbers of those that have previously had COVID-19, and the accelerating pace of vaccination. These later two reasons place us closer to “herd immunity.”
 
The stock market has taken notice of this better COVID-19 news, hitting new recent highs as returning to normal economic activity becomes more likely. However, this doesn’t mean COVID-19 risk is behind us, especially as virus strains from the U.K. and South Africa look to be more contagious and possibly more severe.
 
Assuming the path of the virus can be brought under control, the economy is poised for rapid growth and recovery. As always, investors need to be careful when selecting companies, particularly avoiding those that are highly valued today on speculation of robust future results that are many years away. When investing in bonds, the same caution is warranted as today’s ultra-low yields don’t support taking default risk.

Reprinted from the March 2021 issue of the Investor Advisory Service. For more information, to download a sample issue, or to subscribe to the best investing newsletter in the U.S., visit Investor Advisory Service.