In 2020 one thing is certain, things can change in an instant and news spreads fast. Market prices are ultimately moved by information, good and bad information will cause market prices to move up and down respectively. Information can be anything from economic data, company data and even fake news. With information circulating faster than ever before in history, it is quite normal to be seeing markets respond the way that they are presently. This concept means that all of this publicly available information would be reflecting inside the prices of the market in some way.
However, how do we know if the market has adjusted prices due to a certain piece of information, or not? It is a bit of a chicken-or-the-egg situation to analyse, so it really does depend on how you look at it. In light of the COVID vaccine announcement, on an individual stock level, we can see a direct link between vaccine related news and specific companies that have been involved; Moderna is up about +260% year-to-date, BioNTech is up about +115%, AstraZeneca (+15%) and Gilead (+0.4%) are up marginally, and Merck (-8%) is down on the year. These rapid swings in company shares, shows that we can expect more movements in companies linked to vaccine headlines until a deployable vaccine is finalised.
When looking at markets as a whole and their overall market price response: in comparison to fixed income markets, equity markets seem to be reflecting a lot more positivity in its pricing around vaccine news. When looking at bond yields, they are at or near record lows across the curve as the Fed keeps rates because of the virus.
WHAT HAPPENED IN MARKETS WITH EACH VACCINE ANNOUNCEMENT?
On the morning of the 9th of November, Citi released a statement that because a vaccine “could take years, widening the range of possible economic paths further, we may only be at the beginning of the COVID depression”. This statement will possibly make history as one of the worst-timed broker comments because shortly after this statement was released, a separate press release announced that the vaccine being developed by Pfizer and BionNTech was 90% effective. About a week later, another contrasting announcement followed this one, that the Pfizer drug only covered effectiveness, but health secretary Matt Hancock warned, that it is not set in stone that this drug will continue to be licensed and distributed, it could still fail when the full results of the phase 3 trials are announced. On the 16th of November, Moderna’s preliminary trial data showed its COVID vaccine to be more than 94% effective. Ernesto Ramos, managing director and head of equities at BMO Global Asset Management, responded to Moderna’s announcement; “I call it vaccine Mondays now, because two Mondays in a row we get vaccine news, and it drives the cyclicals forward… So, the fact that we can now see through to the end of the COVID pandemic because of the presence of the vaccines, allows the market to just focus on that outcome at the end of 2021 and disregard the bad news around the short term.”
This is a perfect illustration of the dangers in trying to time the market based on news releases. Had an investor sold investments – or worse, shorted the market based on the strong statement of the Citi release, they would have been left feeling especially sore after the Pfizer and BioNTech statement moments later. Should an investor then have bought big on the Pfizer and BioNTech note, the following week’s licensing announcement would have also left a sting because market prices did not like that information. Again, we saw another market response with Moderna’s announcement another week later. The question remains an age old one, will the market maturely be able to stay focused on the positive horizon or will it be driven in the ebbs-and-flows of good-and-bad news as we wait for the COVID chapter to close.
WHAT ARE THE EXPERTS SAYING?
JP Morgan Michael Cembalest, chairman of Market and Investment Strategy comments that there are two sides to the vaccine coin—”what it means for health and human safety and what it means for the macro and market environment”. Let’s focus on the macro and market environment side. A successful vaccine in itself is one element to consider, additional factors like accessibility of the vaccine and its distribution will also affect the market.
Markets responded to the most recent announcement of the vaccine in a specific way. Ultimately, all this means is that when the vaccine news was released, at large, certain trends were seen across the market as investors responded to this news and started to move their capital. So, where did they move it? Initially growth stocks dropped while value stocks increased in Europe, banks also increased. This confirmed investment analysts’ beliefs that markets are seeing the beginnings of a change from investing in growth stocks to investing in value stocks. Some believe this has already happened in part and others believe it has yet to come. UBS Global Wealth Management Chief Investment Officer Mark Haefele commented on this value change-over that seems to be showing face a little bit; “Investors need to diversify for the next leg, toward more cyclical parts of the market that have lagged behind in 2020, and away from big tech beneficiaries.” With all the uncertainty around COVID it is hard to say exactly when this next leg will be and what else will happen in the interim. Needless to say, trying to time it as an individual investor is not something we advise. Rather get a professional to help you in these times.
With all this uncertainty, financial planning remains a key cornerstone to investor sanity.
Greg Fleming, CEO of Rockefeller Capital Management, advises investors to have a plan.
“We’re very focused on long-term plans, and making sure to do that with somebody who’s providing advice… That’s a really, really important thing in markets like this, and you see it when it’s not possible for anybody to be able to call the types of things that are happening in these markets… So advice, having a plan and sticking with it. Very, very important.”
WHAT HAPPENS WHEN WE DO GET A VACCINE?
For the economy a reliable vaccine would mean, economic lockdowns and social distancing policies will relax. This would in turn mean economic activity and growth will have a clearer road to run along again. Earnings for companies is likely to grow and in turn, investor confidence will most likely follow that with an increase in investments. During the pandemic, consumers have shown huge adaptability, largely attributed to their move to the digital economy. Although some industries have adapted and changed operations during COVID-19, the verdict will be out on if those changes hold permanently or if it will be ‘back to the workplace in droves’ for everyone again.
As the COVID-19 hurdles slowly phase-out, other potential sectors that would benefit from growth following a vaccine are airlines, real estate, hotels and leisure, and energy. These however, are all still expecting weakness ahead while they play catch up on revenues already lost.
We at Fairtree believe that it is difficult to time the markets and be always right. Therefore, a disciplined investment approach that focuses on long term objectives serves our clients better. The vaccine news has heightened short term volatility in the markets, but we remain focused on avoiding the short-term noise and sticking to our investment process. We will participate in the opportunities brought about by the vaccine breakthrough as and when we see clarity in these trends.
– Kheara Lugg & Cephas Dube
Article Credits: https://life.spectator.co.uk/articles/what-does-a-covid-vaccine-mean-for-markets/ and https://www.cnbc.com/2020/11/10/this-changes-everything-what-the-vaccine-news-could-mean-for-markets-in-2021.html , https://www.cnbc.com/2020/11/16/stock-market-today-moderna-covid-vaccine-experts-on-what-to-watch.html , https://www.morningstarfunds.ie/ie/news/204132/what-a-covid-19-vaccine-means-for-investors.aspx and https://www.jpmorgan.com/securities/insights/how-much-does-the-market-care-about-a-vaccine