- How will vaccines impact markets?
- Will Georgia’s Senate tie-breaker roil the market?
- HCM’s next portfolio steps.
Equities rallied last week with the S&P 500 rising 2.2%. Positive news from Pfizer concerning a COVID 19 vaccine gave investors optimism that a return to more normal economic activity is in the cards. More important than the rise in stock prices was the sharp style rotation, as cyclical and value sectors outperformed defensive and growth areas. This is the momentum shift that HCM has been expecting to see. In fact, the NASDAQ (the poster child for growth stocks), which has led the rally from the bottom, lost ground last week. Last Monday as the market reacted to Pfizer’s news, beaten-up value stocks outperformed growth stocks by more than 5%.
Moderna added to the good vaccine news earlier this week with a vaccine that is being billed as more effective than Pfizer’s, with a longer shelf life as well as easier storage and transport requirements. We believe good news from other drug manufactures is likely over the next several months, making the post-COVID future even brighter.
We are now entering the tug-of-war phase for the markets where risks to the economy linger as the virus continues to spread causing stress in homes, communities, and hospitals. Lockdowns in Europe create renewed recession risk overseas. And while HCM considers it a low probability, targeted shutdowns are certainly a possibility in the U.S. as the infection continues to spread. The economic consequences could postpone our economic recovery.
“Georgia on My Mind”
In addition to the good medical news we have received recently, we are past “Election Mania”, and it appears that we will have a narrowly divided government that should forestall significantly higher income and estate taxes. We will not know for sure until the Georgia Senate elections are held on January 5th. Assuming Republicans keep control of the Senate, we would expect to see compromises dealing with both fiscal stimulus and infrastructure. HCM views the reduced risk of increased taxes and the potential for fiscal relief as positives for the economy and markets.
Even if there are political hurdles to get over during the intermediate term, we believe the U.S. and global economies will receive the fiscal support they require to get their economic engines running and again become self-sustaining. That would provide the necessary foundation for stocks and other risk assets and would allow for a more sustained rebound in corporate profits. If global economies do not receive the necessary support to overcome the economic challenges presented by COVID-19, the near-term future of stocks will be at risk.
While the precise timing is impossible to know, we believe the economic support will be provided and we will return to a more normal economic life within the next twelve to eighteen months. This will add fuel to the economic fires that support corporate earnings and ultimately stock prices in areas that have been shunned for years. When this happens, we would expect a rotation toward more foreign equities, value, and cyclical styles as well as smaller companies. We saw a flash of this over last week and expect to see more as a brighter future comes into view over the next several months.
It is important to remember that periods of transition are typically accompanied by short-term volatility. When they occur, expect us to use those pullbacks as opportunities to increase our exposure to the areas outlined above.
We understand that COVID-19 fatigue is rampant, especially among those who have contracted the disease in this newest surge. It is ever present for those with loved ones in hospitals and nursing homes that will not permit visitors and for those experiencing depression due to social restrictions. Our prayers go to all those so affected.
But, just as spring follows winter, we believe this dark time will end and the markets will look favorably on the transition back to normal economic times. To capitalize on the rotation described above we have already started the process of modestly over-weighting value styles and will do so with the other asset classes as relative strength develops in these areas over the next several months.
Weekly Focus – Think About It
"Great minds discuss ideas, average minds discuss events, small minds discuss people."
- Eleanor Roosevelt
If you have questions about the recent market conditions, please contact a member of HCM’s Wealth Advisory Team:
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