Early on Monday morning, pharmaceutical multinational Pfizer announced its development of a potential Covid-19 vaccine, found to be more than 90% effective in protecting people against the virus. Finally, after a year plagued by social restrictions, rising case numbers and economic turmoil, the world had some news to be cautiously optimistic about.
Monday was, consequently, an interesting day in financial markets. The news breaking in the early morning meant a flurry of activity as worldwide markets opened. Europe performed positively while the S&P 500 grew despite a downturn in technology stocks. Losses from uncertainty over the US election and the second wave of Covid-19 in Europe were, to some extent, recovered.
The announcement came as markets were riding the crest of a wave, following the eventual conclusion of the drawn-out US presidential election – the Eurostoxx, the S&P 500 and even the FTSE 100 were already enjoying an uptick. Joe Biden’s new Covid-19 taskforce has been revealed to some fanfare, with many hoping it will reverse some of the disastrous decisions made by Donald Trump and his administration when dealing with the virus.
Markets have, recently, become accustomed to volatility. The prospect of a comparably peaceful White House, coupled with light at the end of the tunnel of the biggest global health crisis in a century, may help to alleviate some of the pressure.
What a return to ‘normal’ really means
The development of a potential vaccine does not, of course, mean we are immediately going to find life back to ‘normal’ any time soon. It does, however, raise important questions about what that world will look like.
This week’s rally offers us some interesting insights to get our teeth into. The news focused on the weak performance of the Nasdaq, which fell 1.5% on Monday despite flying last week. US tech stocks have, in large parts, fueled the year’s recovery, but the prospect of a vaccine has pushed flows to other sectors, like cyclicals, which still have some way to go to recover pre-Covid valuations.
In a world where the pandemic is raging, digital companies dominate. You only have to look at the share price of video conferencing company Zoom to get an idea – incidentally, Zoom shares have taken a significant hit this week. Traditional businesses have suffered. The recession, the real estate crisis, the drop in the price of oil, low rates – it’s been a difficult time for traditional industries.
Investors seem more interested in changing consumer habits than they do in quarterly earnings reports, which have been hit by the pandemic, making fundamentals difficult to assess. Since the beginning of this year, the disparity has been clear: the growth sector has grown by over 25% and the value sector has contracted by over 7%.
In a post-Covid world, though, alternatives will begin to emerge. Digital companies might start to seem expensive for what they are – their multiples are high and their growth prospects are perhaps exaggerated. These are, of course, short-term dynamics, but they give us an idea of how the recovery could evolve in 2021, a recovery which will likely shrink the disparity in performance between the tech sector and the rest, as well as between growth stocks and value stocks.
What this all means for investors
Ultimately, investors should be feeling cautiously optimistic. The progress made in vaccine development is positive but it’s not a silver bullet to uncertainty – spring is still some way away, after all.
The fact that certain sectors have paid the price of the pandemic more than others – Europe more than the US, traditional more than tech – is interesting in terms of their growth potential going forward. Of course, this potential is intrinsically linked to the resolution of the health crisis, but it’s an interesting thought nonetheless. It’s too early to say that, in 2021, we’ll see a strong performance from Europe and from value sectors, but the signs for these areas are promising.
For investors, the emotional roller coaster of the past couple of weeks will likely calm down for a while. The best thing investors can do is keep a cool head – we’ve seen how performances can change quickly and a long-term perspective remains the best approach for uncertain times. Similarly, spending too much time and money chasing top-performing sectors – like technology in this instance – will not necessarily reap the rewards that the last six months might suggest.
Monday’s rally was by no means a signal that uncertainty is behind us. We still have a long way to go in vaccine development and, crucially, distribution, before life can return to ‘normal’. What it does give us, however, is valuable information on how the market might behave in the not too distant future, helping us to make the most of the opportunities that might arise during the recovery period.
Anything could happen over the next few months – issues with the vaccine, a spiralling infection rate, etc. If the last week or so has shown anything, though, it’s that the opposite is also true; things can, at times, go better than expected. One swallow doesn’t make a summer, but it will always be a swallow.