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I Do Like Mondays

By:

Chief Strategist at Interactive Brokers

Today we received some unequivocally good news – by now you likely know that Pfizer (PFE) had a 90% efficacy rate in its Covid-19 vaccine trial.   We all desperately want and need to get back to a sense of normalcy, and an effective vaccine is the key to that return.  It is hardly surprising that markets around the world are soaring on the news, with major US indices reaching all-time highs. 

On a morning like this, with so many cross currents affecting financial asset prices, I find it preferable to raise a series of important points for current and future consideration rather than laying out a long narrative.

  • Markets were already rallying on the news that Joe Biden is now considered President-elect.  There was immediate comfort with the idea that an “establishment” Democrat working with a divided Congress would bring about a positive economic climate with little prospect for higher corporate and capital gains taxes.  Markets are also content with the lack of progress that the Trump campaign is having toward lawsuits that might upend the results.  The vaccine news does nothing to change those factors.
  • Will the vaccine news finally put the kibosh on stimulus talk?  It is fairly clear that it will still take months to approve, manufacture, and distribute sufficient doses of the vaccine to millions of people.  But it was also likely to take months to work out a stimulus package, despite the faint hopes that one could be achieved by a lame duck Congress and President.  That means that the next round of serious negotiation is likely to occur at a time when vaccine distribution is imminent.  Would a reluctant Senate be in any rush to move forward with stimulus?
  • Wither the Fed?  Central bankers know that monetary policy usually operates with a lag.  Today’s news means that any new monetary stimulus could potentially coincide with an economy that is reinvigorated by the prospect of a vaccine.  Considering how difficult is to remove monetary stimulus from a debt-addicted economy, it seems likely that they will go no further than reiterating their vigilant stance and doing their best to assist where it is most likely to help smaller businesses.
  • Higher bond yields are telling the story of a stronger economy and a “hands-off” Federal Reserve.  Many considered that yield curve control was a possible next move for the Fed.  That depressed long-term bond yields.  The sharp rise across the whole yield curve (10 year yields + 12.5 basis points to 0.945%) is not helping bond investors today
  • With infections continuing to rage and rollbacks occurring throughout the US and much of the world, the economic climate is likely to get worse before it gets better.  Which business and sectors of the economy will find it difficult to endure the ensuing months of pain?  Those would likely be smaller, more economically sensitive companies.  As of now, with the Russell 2000 up about 6%, any concern is being put aside in favor of longer-term prospects for economic growth.
  • The stay-at-home trade is unwinding, in some cases quite violently.  Amazon (AMZN), Netflix (NFLX) and Shopify (SHOP) are all about 2-5% lower, while some of the true market darlings like Zoom (ZM) and Peleton (PTON) are down by double digits.  Conversely, a wide range of travel and entertainment stocks are showing double digit gains from depressed levels.
  • Gold and Bitcoin remain perplexing.  Most economically sensitive commodities are higher for the reasons expressed above.  A stronger economy, bouncing back amidst a still-accommodative monetary climate should stoke inflation fears.  Yet both are lower.  They are instead reacting to US dollar strength and the safety trade rather than acting as an inflation hedge.  While the election remains contested by the Trump campaign, the worst fears of chaos and violence have not materialized.  In this case the general good feelings do nothing to help those alternative investments.
  • VIX is lower, but not by a huge amount.  The whole VIX curve is in a tight range, with a low of roughly 23.5 in the spot index and November futures and a high of 25.5 in January.  That implies roughly 1.5% moves for the next 30 days and beyond.  That is in line with what we have seen over the past few weeks (20-day SPX historical volatility is 24.77), but VIX in the 20’s is still a high level by any standard.  That tells us to…
  • Stay tuned.  Violent moves like we saw this morning do not normally resolve themselves in one or two trading sessions.  Coming on the back of last week’s rally, we find ourselves in a situation where positive news arrived on the back of an already overbought market.  We will need to be vigilant for signs whether this is the start of a new leg higher or the culmination of a prior leg.
Disclosure: Interactive Brokers

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