Equity markets broke out to a fresh record high on optimism surrounding a vaccine, with the S&P 500® Index up 11% for the year. Markets are set to extend their gains on Monday following the release of encouraging data from Moderna on their vaccine candidate. The total market cap for global equities set a record at $95.5 trillion, up from $88 trillion at the beginning of the year and $62 trillion at the March low.
Encouraging vaccine news continues to support pro-cyclical and value sectors, which have seen strong relative performance this month after a period of historic underperformance. Supporting this rotation is the prospect for additional stimulus, continued improvement in earnings, a historic valuation gap and the prospect for improving global trade under a Biden administration. While it is too early to feel confident in the trend, this month has seen value has outperform growth (+11% vs. +8%), small caps outperform large caps (+13% vs. +10%) and international outperform domestic (+13% vs. +10%).
By and large, investors are taking a glass-half-full view of the markets right now. But there is also current data that paints a different picture. Fears of a double-dip recession are on the rise, with sluggish trends in several high-frequency data points including retail foot traffic, restaurant reservations and small business hiring. This is further complicated by the lack of additional stimulus, as some of the support measures run out, and a compromise is difficult with the control of the Senate unsure until after Georgia’s January 5 runoff vote. The disappointing reading on consumer sentiment Friday reflected these trends, with a sharp deterioration among Republicans and only modest improvement among Democrats following the election. When it comes to near-term market trends, the jury is still out, and bearish investors have plenty of evidence to make their case.
Following last week’s encouraging vaccine data from Pfizer, Moderna released results of their trial showing it is 94.5% effective, compared with 90% from Pfizer. Of the 30,000 trial participants, 90 cases were observed in the placebo group, with just 5 cases in the vaccine group. Additionally, the logistical and distribution challenges are less severe, as it can be stored in a refrigerator for up to 30 days, compared with Pfizer’s at -94° F. The company plans to apply for emergency use authorization in the coming weeks, expecting to have 20 million doses ready by the end of the year and up to 1 billion next year.
The positive vaccine news comes against the backdrop of record cases of 177,000 on Friday. Michigan and Washington instituted strict measures, including ordering high schools and colleges to stop in-person classes, closing restaurants to indoor dining and stopping organized sports. Two of President-elect Biden’s advisors said they favor targeted, local measures to stop the spread, but oppose a nationwide lockdown.
Interest rates continue higher as investors’ view of inflation shifts. Last week’s CPI reading noted benign inflation, though the 5-year breakeven inflation rate derived from the TIPS market show an expectation of 1.64%, up from the March low of 0.12%. This has driven rates higher, with the 10-year yield at 0.91%, though tight credit spreads aid corporate borrowing rates.
What to Watch
Key economic data this week include retail sales and industrial production on Tuesday, housing starts on Wednesday and leading indicators and existing home sales on Thursday.
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