The Virus, the Vaccines and the V-Shaped Recovery
Equity
November was a month of hope for the markets–and the world at large–when multiple companies announced potential Covid-19 vaccines. The three most promising vaccines come from Pfizer-BioNTech, Moderna and Oxford-AstraZeneca in Phase 3 clinical trials.
Markets reacted accordingly, with the Dow posting its best performance since 1987, and surpassing the 30,000 mark for the first time in history. The S&P 500 and Nasdaq both had their biggest monthly advances since April, and it’s worth mentioning that the Nasdaq has posted a new all-time high 45 times for the year so far.
The Pfizer-BioNTech vaccine has a 95% efficacy, but must be stored at -70o C. Moderna’s vaccine has a 94.5% efficacy and can be stored at -20o C, but comes with the caveat that it uses technology that has never before been used for a vaccine–a modified version of the virus’ genetic code. The Oxford-AstraZeneca vaccine is 60%-90% effective depending on the dosage, and can be stored in a regular refrigerator.
All three vaccines should be available for mass distribution in major world economies by the end of the first quarter of 2021, marking the beginning of the end of this global ordeal and the potential for a swift V-shaped recovery for many struggling markets and stocks.
Investors are likely to begin filtering out of the stay-at-home stocks, such as Zoom, and pouring back into consumer services, airlines, hotels and other stocks that were hardest hit by lockdowns.
On the election front, the transition to power to US President-elect Joe Biden is finally beginning, and markets welcomed word that Biden has selected Janet Yellen, a widely respected former Federal Reserve chair, as Treasury Secretary. Further, should the government remain divided, this would also be viewed positively as it means the 2017 corporate tax cuts would likely remain in place. More fiscal stimulus is likely to be next on the agenda, which would provide some inviting tailwinds for the stock market.
It’s been a November to remember and the pains of the March meltdown now seem long gone. However, until vaccines can be effectively distributed, Covid-19 cases are continuing to rise and global economies are still under stringent lockdowns. Thus we expect some pullbacks at these levels which would be much welcomed entry points to the market as world economies potentially begin re-opening in mid-to-late 2021.
Fixed Income
The benchmark 10 year treasury yield ended the month of November flat at 0.84%, after almost touching the 1% mark during the month, when markets reacted exuberantly to the encouraging news of a potential Covid-19 vaccine from Pfizer. The mood shifted once investors digested the fact that several challenges remain as to how the vaccines can be stored and distributed effectively to billions of people around the globe as cases continue to rise and new lockdowns are imposed.
The 10 year treasury yield is used to gauge investor sentiment, since it can serve as proxy for measuring how confident investors are in the economy. Bond yields move inversely to prices–when investors are confident in the economy and markets, the demand for bonds decreases in favour of riskier assets like stocks, thus bond prices drop and their yields consequently rise. The opposite effect occurs when investors are spooked and pour into bonds as a safe haven. The 10 year treasury yield started the year at 1.88%, and dropped as low as 0.32% during the Covid-19 sell-off in March.
Despite the rise in Covid-19 cases for the winter, the prospects of multiple new vaccines coupled with relatively strong economic data, can continue to boost risk sentiment as we head into year-end.
US consumer spending is expected to increase for the Christmas season, and US GDP growth is projected at an optimistic 11.1% for the fourth quarter.
Originally published in the Trinidad and Tobago Business Guardian Newspaper on behalf of Ansa Merchant Bank Limited.
The information contained in this article is not intended and should not be used or construed as an offer to sell, or a solicitation of any offer to buy, securities of any fund or other investment product in any jurisdiction. The information in this article is not intended and should not be construed as investment, tax, legal, financial or other advice. Past performance is not indicative of future performance.
