Now that we have made it past the election (except for the Georgia Senate runoffs), the market is focusing on fiscal stimulus and the coronavirus for direction. The latter drew both positive and negative headlines this past week, with Pfizer reporting their vaccine was more than 90% effective in a large study just as the third wave of the virus advances throughout the U.S. Stock markets surged on the encouraging vaccine news, although the winners looked different than what we’ve become accustomed to.
On Monday, Pfizer and partner firm, BioNTech, released initial results from Phase III trials showing that their vaccine was more than 90% effective in preventing COVID-19 infections. The 90% efficacy results easily cleared the 50% bar set by the Food and Drug Administration (FDA) for vaccine developers to submit their candidates for emergency authorization. It also bodes well for other vaccines in later stages of testing including Moderna’s, which is also using mRNA to generate virus proteins.
Although the results are only preliminary, the encouraging vaccine news has raised hopes for a quicker pace of economic recovery. Pfizer/BioNTech plans to request Emergency Use Authorization from the FDA by late November, which is after half of the patients in their study have been observed for any lingering safety issues for at least two months following their last dose (there are two doses). The FDA is estimated to take 2-4 weeks to approve filings. That puts initial vaccinations of high-risk groups at late December or early January 2021. Putting potential distribution concerns aside, Pfizer announced they will produce 50 million doses globally by the end of the year and 1.3 billion doses in 2021.
Undoubtedly, it will take some amount of time for vaccines to be widely available, but once approval and distribution takes hold, the sectors of the economy most hindered by the virus will unleash months’ worth of pent up demand. With COVID-19 cases surging again, it may be difficult to look optimistically to the other side of this gap, but it is coming.
The vaccine news this past week facilitated some market reversals already happening. Investors pulled away from the large cap technology and consumer discretionary “growth” stocks that had powered the market higher since March and shifted into economically sensitive stocks seen as likely to benefit from a post-pandemic recovery.
The “blue chip” industrial laden Dow Jones Industrial Average rallied 3% on Monday and 4.1% for the week, while the technology laden NASDAQ 100 reported a 2.1% loss on Monday and 1.2% loss for the week. According to Dow Jones Market Data, the last time that the Dow outperformed the NASDAQ by this magnitude for a weekly stretch was during the tech bubble recession of 2002.
FANG members Amazon.com and Facebook both fell more than 5% this past week, and 2020 darling video conferencing company Zoom Video Communications slumped 19%. On the other end of the spectrum, the energy sector (+17%), financial sector (+8%), industrial sector (+5%), and travel companies rebounded nicely. Individual winners included Chevron, which gained 17% in its best week since 2008, and Delta Airlines, which gained 16%.
Smaller company stocks, which were deeply discounted by the coronavirus recession, are also roaring back to life. The Russell 2000 has gained 13% this month and closed at a record high on Friday for the first time in more than two years. More specifically, the Russell 2000 Value index outperformed its diametrically opposed counterpart – the Russell 1000 Growth index – by more than 10% over the past week.
From a global stock market perspective, just like the US equity market this week, the vaccine news drove market returns and caused underlying sector rotations. The best international country index performer was Spain, which was up 13.3% in EUR (12.8% in USD) this week, thanks to a huge rally in European banks. France, the U.K., Mexico, and Italy also outperformed materially, and the Euro Stoxx 50 was up more than 7%; however, many emerging market countries and Europe remain far below 52-week highs, unlike the U.S., Japan, and just a handful of other countries.
As far as interest rate markets are concerned, the vaccine news on Monday led the 10-year U.S. Treasury yield to rise substantially (0.14%) to nearly 1%. It may not seem like much, but we were dragging along at nearly 0.5% during much of March through August. The yield curve was also sharply steeper on the session, with the spread between 2-year Treasury notes and 30-year Treasury bonds rising to 1.56% – the highest levels since June 1, 2017.
All of these market reactions appear appropriate and forward looking, even in the face of increasing COVID-19 cases. While we don’t expect rotations and the “reopening trade” to be reliably consistent, this past week gave us some clues of capital markets potential in 2021.
Have a great Sunday!
Timothy W. Ellis, Jr., CPA/PFS, CFP®
Senior Investment Strategist, Wealth Strategist