Video Update: From Euphoric to Anxious…and Back
Here’s my video presentation for today. In the article below, I provide details and also unveil an investment opportunity.
Investors have undergone wild mood swings during the past week. Euphoria over Joe Biden’s win lapsed into despondency over challenges to the results, but then back to good cheer when those challenges fizzled and Biden won recounts.
Same goes for the coronavirus. Optimism over the coronavirus has waxed and waned. Vaccine news initially cheered investors, but surging infections and deaths brought the mood down again. As of this writing on Monday morning, the U.S. has surpassed 11 million COVID-19 cases. Over the weekend, Michigan and Washington joined other states by imposing new restrictions.
That said, by the closing bell last Friday, the manic-depressive behavior on Wall Street finished on the upside. The S&P 500 last week posted a new record high and global equities scored a second consecutive week of gains after news of progress in developing a coronavirus vaccine.
Stocks soared last week after biotech giant Pfizer (NYSE: PFE) and its partner BioNTech announced that their COVID vaccine showed 90% effectiveness in their large study, spawning hope that the virus could be contained.
U.S. stock futures this morning are trading higher, with the Dow Jones Industrial Average poised to open about 300 points in the green. Boosting markets is the announcement Monday from drugmaker Moderna (NSDQ: MRNA) that its coronavirus vaccine is 94.5% effective.
Fact is, there’s a huge reservoir of cash waiting in the wings for the post-COVID economic renaissance to come. But first, we have to get through the annus horribilis of 2020.
Conditions already are in place for economic recovery; an effective vaccine would accelerate the rebound. Cyclical sectors that previously had been clobbered by COVID outperformed last week, while sectors that have gotten a lift from the pandemic (e.g., technology) lagged the broader market. The high-flying NASDAQ paused for a breather whereas the Dow and the S&P 500 climbed (see table).
Rotation also occurred among asset classes, with small-cap and international stocks outpacing U.S. large-caps. The surge in small caps is a sign that investors are optimistic about economic growth in 2021.
President-elect Joe Biden won recounts in Arizona and Georgia last week, pushing his Electoral Vote win over President Donald Trump to 306 versus 232. Biden’s win was decisive and the GOP’s charges of “fraud” are evaporating. The winding down of political uncertainty is a major tailwind for equities. However, clouds linger on the horizon.
The vaccine paradox…
The Pfizer and Moderna vaccines lay the foundation for beating the virus, but they’re not silver bullets. It will take many more months to develop a safe and effective vaccine that gets approval from the U.S. Food and Drug Administration.
Even when a vaccine is ready, millions of Americans will refuse to take it and distribution could prove a logistical nightmare.
Paradoxically, emergence of a vaccine could undermine the COVID fight, by making people complacent and less willing to adopt safety measures such as wearing masks and social distancing. Nonetheless, the Pfizer and Moderna vaccines offer a path to eventual normalcy.
It’s noteworthy that stock market gains last week were achieved amid choppy trading, as coronavirus headlines provided mixed news. Upward momentum for the markets should continue for the rest of the year, but we’ll experience considerable volatility along the way.
Keep an eye on major economic data scheduled for release this week. Key reports include retail sales and industrial production (Tuesday); housing starts (Wednesday); and initial jobless claims and existing home sales (Thursday).
The third wave…
Now that the tumultuous U.S. presidential election is over, investors are giving greater attention to the deadly coronavirus pandemic. Last Thursday, the daily number of new infections surged past 150,000 for the first time (see chart).
The U.S. is experiencing a third wave of coronavirus infections that’s worse than the spring and summer waves. As hospitals throughout the country fill to capacity, the country faces a humanitarian crisis.
The alarming spike in COVID cases will continue to roil markets. Beneath the euphoria over the election is an undercurrent of fear that the resurgent coronavirus will undermine the fragile economic recovery.
Reimposed lockdowns would devastate a jobs market that’s struggling to recover. The government reported last Thursday that initial jobless claims last week fell to 709,000, the fourth consecutive weekly decline and the lowest reading since the pandemic began (see the following chart).
To be sure, the employment situation is improving, but as you can see from the chart, it still has a long way to go.
One favorable sign: improving bottom lines. Third-quarter corporate earnings are exceeding expectations and they’re expected to return to robust growth in the first quarter of 2021. So far, more than 80% of S&P companies have surprised on the upside for Q3 by an average of 17%, according to research firm FactSet.
Next year will likely mark the start of a new secular bull market, but in the meantime buckle up. We’ll suffer coronavirus-induced turmoil along the way.
The show business subsidy…
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