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| Pfizer-BioNTEch, Moderna are pulling back the curtain on a post-coronavirus world- and investors are cheering! |
And just like that, the Santa Claus Christmas rally came early! More than a month early, in fact, beginning with the stunning November 9th announcement that a vaccine co-developed by the pharmaceutical giant Pfizer and Germany’s biotech company BioNTech had an astonishing efficacy rate of 90%. Clearly biotech companies were benefiting from massive cash infusions, streamlined pipelines, and readily available patient response data from compassionate use programs to expedite testing results. Then, if that were not enough, Moderna soon followed with their own announcement that their own vaccine was also 90% effective. Markets roared higher as fund managers and trading algorithms scrambled to ingest the information and then position accordingly.
The results were spectacular. Since the start of November – a little over a month ago – the S&P 500 has risen 12% to just below the all-time closing highs set on Tuesday. Still not impressive enough? The Russell 2000, far more representative of the broader market, rose 24% in that same time period. Absolutely incredible gains across the board amid a seismic shift from the so-called stay-at-home trade into cyclicals and value names. Breaking it down further, S&P 500 energy names rose 41%, followed by beleaguered Financials and Industrials, up 19% and 17%, respectively. The Ignorant Investor and many other investors who had been positioning for a bullish turn to the market saw very substantial gains (well north of 40% for multiple beaten-down names The Ignorant Investor had picked up) just in time for Christmas!
What's Ahead
The stock market continues to have substantial tailwinds in coming months, leading The Ignorant Investor to remain quite bullish. However, as is usually the case, quality, well-positioned companies will again be expected to strongly outperform the broader market. Be sure to coordinate closely with your financial advisor to come up with a good game plan that fits your investment strategy!!
Driving Bullish Sentiment
1. The coronavirus Covid-19’s days are numbered. With several high-efficacy vaccines already in production and numerous other potential treatments and vaccines in the pipeline, there is certainty that the virus will be brought to heel in 2022, and life will likely resume a semblance of normalcy in the United States by end of year 2021 (likely sooner with smooth vaccine production and rollout).
2. Economic recovery continues to plod forward. Economic data from across the manufacturing and services sectors have seen broad if uneven recovery since the March lockdowns and employment numbers continue to improve. Subdued economy activity is to be expected, however, until the vaccine becomes widely available; in the meantime, support from the Fed (see point 3) and stimulus from Congress (see point 4) will help bridge that gap.
3. Heavy monetary support from the Fed will sustain the economic recovery. This will also drive moneyed people and institutions further out on the risk curve in search of yield (sound familiar? The story from the old QE days is becoming relevant again!).
4. Stimulus discussions have resumed in earnest. Following a widespread, bipartisan rebuke from the American people, Congress will likely be able to put aside their differences post-Presidential election and come up with a package solidly in middle ground. Non-farm payrolls coming in below expectations in early December should help nudge bureaucrats forward.
5. Political uncertainty is fading fast. Uncertainty around the Presidential election dissipated after Biden picked up enough votes to secure the Presidency, with the Electoral College expected to certify these results when they meet on Monday.
Clouds on the Horizon
1. The coronavirus is running rampant across the United States. This week, the sobering data emerged that 200,000 Americans are testing positive for the coronavirus every single day. The great news is a vaccine is coming, the less-great news is that the general population needs to maintain careful social distancing norms until a majority of the population has received the vaccine. Winter is coming, and people need to remain cautious to firstly save lives, and secondly avoid forcing a second wave of economic lockdowns.
2. Political risk remains since control of the Senate is not yet certain. A split Congress would be a nice gift to the equity market by keeping the government policy more balanced and tempering the capabilities of fringe players for either party to influence policy. Two runoff elections for Georgia in early January will determine how this goes down. Markets have not priced in the potential for political risk stemming from stronger regulatory and tax policies should a single party control both Congress and the White House.
3. From a valuation perspective, the stock market is looking expensive. From a traditional vantage point, the S&P 500 is trading at an elevated level to historic norms. For the current market, however, this seems to be a relatively minor worry (see “Bullish Sentiment” point 3 and also consider the huge amount of cash sitting around). For some specific investments and companies however, massive bubbles may already be forming (*ahem* hydrogen).
Notable Stories from November and early December
Investment Euphoria Around IPOs is Worrisome
Doordash has been a Godsend during the pandemic, helping get food to people in their homes in the midst of lockdowns. But let’s get real: it’s a delivery service with a very shallow moat. So, is it really worth $55 billion? After all, Fedex is valued at $77 billion. Then Airbnb opened at an eye-watering $145/share before dropping slightly to Friday’s close of $139/share- but still the question must be asked, is it really an 84 BILLION dollar business? The less sexy Marriott International, which manages and franchises everything from The Ritz-Carlton to Sheraton hotel brands, has a total market capitalization of $42 billion dollars. And while this isn’t a fair comparison (enabling people to rent out houses and apartments is different from a traditional hotel chain), Marriott does make a profit. For some more "under the hood" information, see
Reuters analysis of how retail traders are driving a majority of the IPO-trading frenzy.
Rebalancing Ahead: Tesla is joining the S&P 500
After the S&P 500 declined to include Tesla in September, the stock experienced a short-lived decline. Since that time, the index has reconsidered and Tesla is now set to join the S&P 500 in December. While adding a stock to the index (which usually floats near, but not exactly at, 500 companies) is typically a small affair, Tesla is very volatile and has become quite large thanks to retail investors bidding the company up in recent months. Now, funds of all shapes and color that promise to track the S&P 500 in some way will also need to own Tesla- and get any fair share of the volatility that the stock might bring. This could be an easy process, or it could get a bit bumpy.
Barrons has a good article summarizing the challenges facing both the S&P 500 as well as fund managers who track that index.
Goldman Sachs has some stock pick suggestions for 2021
