Promising Vaccine Announcements Induce Market Rotation into Value
Market Recap week ending 11/13/2020
Financial markets rallied to all-time highs on news that Pfizer and BioNTech have a 90% effective Covid-19 vaccine. The news induced a robust rotation trade out of Mega-cap Technology shares into value-oriented cyclicals. Financials, energy, and industrial sectors lead the way while information technology and consumer discretionary shares lagged. The S&P 500 gained 2.2%, the Dow rose 4.1%, the Russell 2000 increased 6.1%, and the NASDAQ fell 0.6%. US Treasuries sold off with the 2-year note yield rising one basis point to close at 0.17% and the 10-year bond yield adding seven basis points to close at 0.89%. Gold lost just over 3% or $65.40 to close at $1886.80, an OZ, while oil increased 8% to close at $40.12 a barrel. There were no changes to our models during the week.
The trading week was all about receding concerns regarding the election and optimism surrounding a vaccine for Covid-19. Election results continued to favor President-Elect Biden while the Trump campaign continued to pursue legal actions to dispute the election. Congressional results continued to show a divided house. Republicans picked up some seats in the lower house, but Democrats continue to hold a majority. In the Senate, it appears Republicans will maintain the majority. Still, two contested seats in Georgia will go to a run-off on January 5th, which has the potential to change the balance. Biden continued to build his transition team with an initial focus on creating a Covid-19 task force.
On Monday, pharmaceutical companies Pfizer and BioNTech announced they had a Covid-19 vaccine that is 90% effective. The news spurred a massive rotation trade out of “stay at home” themed stocks into beaten-down cyclicals. Airline stocks and other travel-related companies traded higher on the news while the technology and consumer discretionary sectors sold off. It is expected that additional vaccine efforts will show similar successes. Moderna and Oxford AstraZeneca could announce the results of their trials in the coming weeks. The positive news on the vaccine front comes as infection rates continue to show dramatic increases worldwide. In the US, daily infection rates have surpassed 180k, which has urged some states to increase lockdown mandates. The lockdowns will likely have an economic impact, while congress continues to be at an impasse in providing another tranche of stimulus. Federal Reserve President Jerome Powell last week warned that the next few months could be difficult for the economy. Markets will likely continue to be volatile in the coming weeks as short-term setbacks related to regional lockdowns are balanced with the positive prospects of an effective vaccine or vaccines.
