As great as Pfizer’s# vaccine news was for a future post-Covid world, there are some hidden hiccups. Vials must be stored at minus 90 degrees Fahrenheit, much colder than most medicines. Once delivered there are numerous time constraints in order to get patients the first of two shots. Existing infrastructure does not support this. A lot of well-respected hospitals in the biggest cities don’t have freezer storage ready, let alone rural America. The case is much worse for lesser developed nations. Further, we do not know if this vaccine prevents you from unknowingly transmitting the disease, how long the vaccine lasts, who is getting it first, are there any age restrictions and what side effects will occur. They are all open questions.
Those concerns are valid from a personal and investment standpoint. The near 2,000 point jump in the Dow Jones early this week is being met with the realizations of what is ahead of us. The Dow has given back about more than half of the gains from Monday, after dropping another 1.1% yesterday. For the week, the average is still up 2.7%, while the Nasdaq Composite is down 1.6%. Near-term concerns are real, but the future looks much brighter than these upcoming colder months.
Trillions in stimulus are working their way through the system. Interest rates, although rising on the long end of the curve, are still at historic lows. Small businesses are being created at a rapid rate. Availability of cheap money is global. Desires for vacations, visiting family, dining out and going to live events are through the roof. All of this pent-up demand and capital is going to be spent, post-Covid vaccine(s).
Even if Pfizer has some issues, we have plenty of other options coming down the pipeline. Moderna should be releasing data on their mRNA product soon. About a dozen other pharmaceutical companies are late in their trials and will present critical data in the coming months. With billions in free Government funding and many shots on goal, we are optimistic technology wins out. That does not even take into account the many treatment options and current knowledge of the virus which has vastly improved since March. This is beatable, in 2021. By no means should we relax our current safety concerns though.
Until then, we’re stuck with a barbell market. One stack of weights are the high growth, low interest rate, pandemic winners. The other end of the barbell is comprised of the reopening trade. Positive vaccine/treatment news fuels cash out of stay-at-home winners and into cyclical reopening stocks. Rising Covid counts and more restrictive reactions does the opposite. This whipsaw has shown itself every day this week. These two buckets can be broken out even further as recent market action could be a precursor to 2021’s winners and losers in each.
• Stay at home winners: We’ve had two sizable corrections in FANGMAN stocks and online beneficiaries of shut-ins recently. One in September, when the Nasdaq dropped 15% in a few weeks. Another this week where the Nasdaq dropped by 6% in just two trading days. What you want to own are the stocks NOT breaking their September lows. Many of the new investor fan favorites like Zoom, Wayfair and Teledoc are breaking down. These stocks were massive winners but are having a tough time reclaiming their uptrend lines and are below September price levels. That is a clear sign of weakness and aggressive selling. With triple digit gains, who can blame investors who are booking some profits here? On the other hand, persistent winners that have built a wider economic moat like Salesforce, ServiceNow and Workday are still near all-time highs and show real, lasting strength. None of them are cheap yet, so there’s plenty of risk.
• Reopening trade: On the converse side, we have the well-known groups that have been decimated by the pandemic. This is the flip scenario. In June, there was an optimistic trade in these names as it looked like the virus was receding. A lot of stocks quickly bounced 25% – 50%. It was short lived as a 2nd wave hit the southern part of the United States and the group got pummeled again. The rally this week brought many of the reopening stocks back to, or above, those June highs. We want to own the leaders who have bested those prices. Not the stocks who are making lower highs. At least for now, the stronger price action is sure to catch investor fund flows as a safer way to play the upside. Massive debt loads, increased share count and loss of business leadership could keep the “bad” stocks from recovering as quickly as investors want. That group is still well below those June spikes and will take more time to recover. Value is still there but it could take longer to come to fruition.
For now, we’re back to the original 2020 playbook unless we get more positive vaccine or Covid news. Predictable growth stories, most of which benefit with work-from-home continuing, are outperforming the rest of the market since the spike on Monday. Long-term yields, after jumping to nearly 1% on the 10-year Treasury, are coming back down. It closed at 0.85% yesterday. Financials, travel stocks and retailers get beaten back down.
The S&P is still range bound between 3,200 and 3,600. This week’s false breakout on the high end may lead to more consolidation. It doesn’t help that the election is still a mess and stimulus talks are uncertain. Today, futures are solidly in the green after another tough quarter came in better than expected for Cisco# and Disney# which are up 5%+. Both are components of the Dow Jones Index.
Again, the long-term scenario of “recovery and growth” looks solid. We just have to get through the next few months which is starting to look like a massive wave of positive tests, shut-ins, closed restaurants, restricted travel and investor fear. Economic data is likely to slow from Q3. We know this. Then we get into confessionary periods where companies prepare for another quarter or possibly a year of uncertainty while trying to offer 2021 guidance. Revenues and earnings predictability for the next several months is questionable at best for anything not benefitting from citizens staying in their houses. The market should know this as well. The recovery play will work, but it won’t be a straight line upwards.
Big day for talk show hosts as Jimmy Kimmel and Whoopi Goldberg turn 53 & 65, respectively. Actor Gerard Butler is now 51.
James Vogt, 610-260-2214