Fireworks after the announcement that the COVID-19 vaccine works in 90% of the cases

Irrational exuberance is what comes to my mind repassing yesterday’s strong market rally in corporate bonds and equities. On Monday until around 12:15 CET markets were across the globe up around 2%, while suddenly we have seen a spike up in European market prices and in US futures.

Pfizer and BionTech have announced that their vaccine prevents COVID-19 in 90% of all tested cases. What followed was a sector rotation out of FANG+ stocks into cyclicals, small caps and value stocks. Cruise companies were suddenly up 20%, luxury goods rallied in similar ways. Airlines and airports have as well gone up sharply. Is this rational? The answer is a kind of obvious. In the best case the vaccine gets in the next 2 weeks an approval from the US authority and the companies might produce until year end 50 million doses. In the best-case next year, another 1-1.5 billion doses, but to get the virus under control we need to have 80% of the world population been vaccinated and this is simple impossible based on just one approved vaccine. Therefore, the virus will be unfortunately still dictating our life in H2 2021! But we learned one thing, the market looks through the actual economic downturn and although the spike was too big, we see light at the end of the tunnel and further upside.

Fig. 1: S&P 500 futures are now trading in uncharted territory

We believe that this is the beginning of a rally, but we also would say after yesterdays move a pullback before a possible next leg up must be expected.

The president elect meanwhile has started to work on a COVID-19 expert task force. Trump on the other hand tries to go to court to get in some states a recount and tries to prove that there was a fraud. The only thing he might prove is that in rare cases dead people got an envelop to vote, like it happened with the subsidy which was distributed in spring. But there is no evidence that there were any irregularities during the counting process. We expect that in January Biden will get started as planned. We might not get a smooth transition or a fiscal package before that. It is still open if the Senate will stay in republicans’ hand. But overall, it looks like a divided situation, where the president does not have the majority in both parliaments. This however is good news for tech stocks and the economy in general. Also, taxes cannot be raised significantly over the coming two years, that is why markets globally were up on Monday morning.

Market participants believe that it does not matter who will lead the congress, in both cases we will get more fiscal stimulus. Mid-term a democratic congress would however have some impact on the implementation of new taxes and green policy. Therefore, we believe divided parliaments and Biden is a better starting point for further market upsides.

Fig. 2: It does not matter who wins the congress

Fig. 3: History tells us markets go up independent of who is US president

There are still two major risks in America, the 3rd Covid-19 wave could force more partial lockdowns. Will Trump be able to stay in charge? The latter looks unlikely. President Biden urges all Americans to wear masks and that this is no political statement but rather the only way forward until vaccines are available for most citizens, We do not expect a 2nd lockdown in the US. The US economy is doing well, because the partially closed service sector is not large enough to drag GDP down significantly.

Fig. 4: Locked-down sectors in percentage of total GDP in various countries

Fig. 5: US and Asian equites are significantly up while Europeans are still underwater

Therefore, the pain trade is still up. Short-term yesterday’s move must be digested before we have a good base for further gains. There is still a lot of money on the sideline which waits to be deployed, but YTD there was positive returns in treasuries, gold, US and Asian equities, which most market participants have missed. European banks on the other side were due to valuation overweight Europe. So far that has not worked out. Forward looking we expect a catch up of European equities but continue to prefer Asian and US equities.

Published: 10/11/20 by Blackfort CIO Dr. Andreas Bickel

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