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Vaccine data pushes equities to record levels

November 10, 2020

Thoughts

  • Markets are set to follow up the best week since April with the strongest open since late March on promising vaccine news and a resolution to the contentious election season. Monday’s open will be at a record level for the S&P 500® Index despite continued economic uncertainty. Volatility has collapsed, with the VIX at the lowest level since August as clarity begins to emerge.
  • Investors are betting that a post-coronavirus and Biden-led market will be pro-cyclical and value led, with financials and leisure stocks leading and technology companies lagging. Given the record performance gap between the Russell 1000 Growth (+30%) and the Russell 1000 Value (-10%) Indexes, a shift would be notable. Small caps are set to explode higher, as are emerging markets. Additionally, Treasuries are selling off, with the 10-year yield up 0.11% to 0.93%, the highest level since March. Commodities are also rallying, with crude prices up nearly 9% in early trading on Monday.

News

  • Pfizer and BioNTech said their vaccine candidate proved to be more than 90% effective in preventing Covid-19 among those without evidence of prior infection. This is significantly better than the 50% efficacy threshold the FDA has established for approval and the 40-60% effectiveness of the flu vaccine. The companies also noted that no serious safety issues have arisen thus far and that they remain on track to ask the FDA for emergency use authorization by the end of the month. This news is a sharp reversal from recent weeks, where experts had become cautious over the timing and efficacy of a vaccine.
  • Joe Biden was declared the next president by the Associated Press on Saturday, though President Trump has yet to concede the election as he is contesting some states’ results. Control of the Senate remains uncertain, with two runoffs in Georgia in January will determine the outcome. Betting markets show a 25% chance of the Democrats taking control. This uncertainty is likely to complicate stimulus negotiations, with Senate Republicans targeting a bill worth roughly $500 billion, with House Democrats insisting on a deal in excess of $2 trillion. Vice President-elect Harris is expected to drive negotiations, which could occur simultaneous with a bill to keep the government open, which is required by December 11.
  • Overshadowed by the election focus is a historically-strong earnings season that has seen a record 86% of companies beat their estimates, beating last quarter’s then-record of 83% and the long-term average of 65%. The magnitude of the beats is at an impressive 20%, down slightly from the second quarter but multiples of the long-term average of 4%. Overall growth is tracking towards -8% with nearly 90% reporting, well above the -25% expected as of June. Estimates for 2021 and 2022 continue to trend higher, now reflecting growth of 22% and 16%, following an estimated decline of 16% in 2020. Large caps continue to widen the earnings gap with small caps, with 48% of the Russell 2000 Index showing a loss, double the long-term average and compared with 23% for the Russell 1000 Index.

What to Watch

  • The Senate reconvenes on Monday, setting the stage for stimulus negotiations or talks on funding the government beyond December 11. Economic data include NFIB Small Business Index and JOLTS job openings on Tuesday, CPI on Thursday and PPI and consumer sentiment on Friday. Wednesday’s slate is empty due to Veterans Day.

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Disclaimers

  • This material is not a recommendation to buy, sell, hold or roll over any asset, adopt an investment strategy, retain a specific investment manager or use a particular account type. It does not take into account the specific investment objectives, tax and financial condition, or particular needs of any specific person. Investors should work with their financial professional to discuss their specific situation.

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