By David Bailin
Chief Investment Officer
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The discovery of an effective vaccine marks a turning point in the fight against COVID-19. However, most investors are not yet positioned for the rotation in equity markets that we expect.
Pfizer’s announced efficacy for its COVID vaccine of “at least 90%” is a turning point against the pandemic. With nine other vaccines in late stage testing, including some that do not require excessively cold transport and storage, it is more likely than not that broad vaccination of populations will occur in 2021. We would expect announcements on efficacy for at least one other vaccine before the end of 2020. A high efficacy rate for several of these more easily distributed vaccines would be a further signpost for a 2021 recovery, as would broad adoption of vaccinations by individuals.
The emergency use approval of Eli Lily’s monoclonal antibody treatment also took place last week, signaling the arrival of potentially more useful treatments for early-stage COVID after Redemsivir was found to have limited clinical effectiveness.
The resurgence of COVID in the US and Europe, though expected, is posing significant immediate economic risks to these economies. We previously forecast a difficult fourth quarter GDP in our projections since April. The economy has entered the November period with greater upward momentum than we expected. Still, it is likely that the coming impact of the pandemic on business will be somewhat greater than we expected due to the lack of a coordinated government response in the US and elsewhere.
The news of treatments for COVID has brought global financial markets to an inflection point. As we wrote last week (Fifty-Fifty: Implications of a Divided Government and Electorate), the “trifecta” for the beginning of a New Economic Cycle includes 1) a conclusive US election, 2) the arrival of viable vaccines and 3) additional fiscal stimulus in the US and abroad. This led a rotation between “COVID-Cyclical1” and “COVID-Defensive2” assets this past week. There was a 6.2% gain for cyclicals versus just a 0.4% increase for defensives in US markets. During the week the “see-saw” between hope and fear was manifest. When investors are fearful of the rapid rise in COVID, the Nasdaq continues to act defensively (rising in value), but the fall in bond prices and action in Gold also suggest that a transition is underway. The vast majority of institutional clients polled by Citi Equity Trading Strategies believe vaccines will continue to drive rotations within equity market performance (see Figures 16/17), but long-only players have not positioned themselves in this way – yet.
A note of caution. We are not “out of the woods”. The number of positive COVID incidences in the Pfizer trials was low (94 at first interim) out of nearly 44,000 participants (half receiving the true vaccine). As we saw in the US election polling, small sample sizes can lead to large deviations in outcomes. Also, as we have pointed out previously on November 1 (An Election, Then an Injection), we do not know how long the protective value of vaccines will be and there is a lot is riding on the production of T-cells in its recipients. Finally, when large populations are vaccinated, it is possible that side effects will arise in materials numbers. Therefore, we must be mindful of the data as it evolves and not assume a straight line for treatments and the nascent economic recovery. There will be many fits and starts. And the scope and timing of the fiscal stimulus package is still very much to be determined.Read the CIO Strategy Bulletin