Just like that, it seems, we’re in a new reality, one in which there’s not just one, not two but three highly effective vaccines for limiting the spread of COVID-19 and saving lives.
Pharmaceutical companies Pfizer (with partner BioNTech), Moderna, and now Astra-Oxford have all announced trial results that showed better than 90% efficacy for their vaccines. Pfizer and Moderna have already applied for emergency approval from the US Food & Drug Administration, leaving open the possibility that the drugs will be available in limited quantities by the end of the year, with wider distribution in the first and second quarters of 2021. As a result, investors may be witnessing the beginning of the unwinding of the COVID-19 trade (even as we see the number of cases spike going into year-end).
This shift can be seen clearly in the relative performance of a number of Exchange-Traded Funds (ETFs). For example, one ETF that is long online retail while shorting brick & mortar stores saw a single-day decline of -8% on November 9th in the wake of the Pfizer announcement. Another ETF that provides long exposure to energy was up 16% that same day on the premise that stronger economic growth would be good for oil demand. The abrupt rotation into value and away from growth was also reflected in the ETF world, with value up and growth down, at least temporarily. (Source: Bloomberg, November 9, 2020)
Finally, the ground has moved a little under inflation strategies put in place in anticipation that the Federal Reserve would remain committed to near-zero interest rates. The speculation: if economic growth returns, can the Fed be less accommodating? The prospect that higher rates might dampen inflation seemed to cause some investors to reconsider their positions, something that was seen in the price action of those asset classes that have traditionally served as hedges against rising prices. For example, an ETF investing in gold miners saw a price decline of -6.0% on November 9th, while another focused on 20-year+ Treasuries also dropped. Another ETF focused on Treasury inflation-protected securities (TIPS) also fell. (Source: Bloomberg, November 9, 2020)
One likely beneficiary of this is commercial real estate, and we saw the anticipation of that in the performance of the IQ U.S. Real Estate Small Cap ETF (ROOF), which jumped on the vaccine news.
There are still significant unknowns hanging over the market, with the most prominent including the fate of an additional stimulus package and the outcome of the two run-off elections in Georgia which will determine the makeup of the U.S. Senate. There are questions, too, about the long-term efficacy of the vaccines and their safety for different subsets of the population. Still, there is no question that the ground has shifted over the last few weeks. As such, investors need to start looking forward to a time when COVID-19 becomes a more manageable disease and its economic impact diminishes.
One likely beneficiary of this is commercial real estate, and we saw the anticipation of that in the performance of the IQ U.S. Real Estate Small Cap ETF (ROOF), which jumped on the vaccine news. Another is banks, where a steepening yield curve, should it materialize, would be positive for earnings. Airlines and travel-related industries have been pounded by the lockdowns and are likely to do better as Americans start moving around again.
To repeat a familiar caution: a few days of trading does not make a trend. In particular, it’s early to conclude that the rumblings of a major rotation in favor of value and away from growth indicate a lasting move. For the moment, the surge in COVID-19 cases and new lockdowns going into the winter are negating some of the positive vaccine news. But barring a major reversal in the approval process, the vaccines will move into wider distribution, infections will eventually start to decline, and COVID-19 considerations will no longer dominate investment strategies. This will be a welcome change most importantly on a public health level, but for the markets as well.