by Peter Jones, CFA
Vice President of Equity Research and Portfolio Management
On the back of the strongest election week returns since 1932, markets rallied sharply to begin this week as Pfizer announced 90 percent efficacy on a COVID-19 vaccine. Even more, the industries performing best were those most sensitive to economic momentum, instead of the “stay-at-home” trade that has dominated the market for the majority of the year with Amazon, Apple, Microsoft, Facebook and Google accounting for around 80 percent of the S&P 500 return. To be sure, data points are conflicting. On one end, we are nearing FDA approval for a coronavirus vaccine but at the same time both daily cases and current hospitalizations are setting new highs. Depending on the state and county, we expect additional lockdowns but do not expect a full national lockdown like we saw in the Spring.
The increasing and accelerating toll from COVID-19 is a tragedy and our hearts go out to the families who have lost loved ones and those facing economic hardship from lost jobs. At the same time, it is our job to be unemotional and objective in our assessment of the market and economy. So, while the spread of the virus is getting worse, we continue to find reasons for optimism and news of a coming vaccine serves to increase our confidence. Despite worsening COVID-19 trends, state and local economies are learning to live with the virus. For example, the unemployment rate has fallen from around 15 percent in the spring to 7 percent this last week. People are returning to work. Economic growth has snapped back sharply, and third quarter corporate earnings came in 19 percent above Wall Street projections.
While the nature of the economic downturn was unprecedented in form, magnitude and velocity, we do not think that there is any reason to believe that the playbook for the nascent economic recovery is different from what we have observed in previous business cycles. When the economy gains momentum, companies and industries that are most sensitive to the economy, or cyclical, perform best. These sectors include consumer discretionary, financials, industrials and materials. On the other end, companies that outperformed during the recession, such as consumer staples, healthcare and utilities are likely to lag once the economy kicks into gear. With this playbook in mind, we have begun to position client portfolios to take advantage of economic improvement. However, as the title of the chart below suggests, we are taking a measured approach to this shift given clear evidence of worsening COVID-19 trends and our belief that it will take months to broadly distribute a vaccine once it is FDA approved. Two steps forward, one step back.
Source: Ferguson Wellman
We would be remiss not to mention political events in the last week and the change we will see in the White House come January 20. Many have forecasted that a Biden presidency would be a negative outcome for asset markets. We learned in 2016 that markets sometimes behave unexpectedly to changes in political power. Once again, many have been surprised to see the 10 percent+ market rally that began last Wednesday. We are steadfast in our belief that when it comes to markets, economic trends are much more important than political parties. History tells us that regardless of which party is in power, markets have always gone up over the long-term (chart below). Undoubtedly, legislative and regulatory changes create winners and losers at the industry and company level, but rarely at the market level. We think this time is no different.
Source: Morningstar
Takeaways for the Week:
COVID-19 trends are worsening, and our hearts go out to families most impacted
Despite the pandemic, the economy is improving, and a vaccine is on the horizon
Regardless of political party in power, markets tend to march higher over the long-term