Your Double Shot is Ready

361 Capital Market Commentary | November 9th, 2020

A COVID-19 vaccine plus a split party U.S. government. Christmas has come early for investors this year. The markets were already flying high on the prospect of a Biden Presidency and a GOP Senate, and then Pfizer/BioNTech dropped its vaccine data earlier than expected. Assuming the 90%+ efficacy with few side effects holds, and the vaccine goes into production and distribution holds, then there is the holy grail to return to a normal economy. It won’t happen tomorrow, but the market is a forward-looking machine and will discount out 9-12 months. With production of the vaccine happening ASAP, we can expect some early doses to begin in December with a ramp through the Q1 and Q2 of 2021. Hopefully by the summer months, the majority of the population will begin to get access. So, booking a cruise and island vacation for Q4 2021 is looking like an achievable goal.

Of course, there is a long way to go before you are going to be drinking Issac’s Mai Tais on the Lido deck. First, we need to get past this current rip in virus cases. It’s spreading fast and furious out here in Colorado and looking like most schools will be classroom-less through year end with holiday meals on immediate-family only tables. I now know too many people who have lost their smell and taste, so they won’t be missing much at the dinner tables anyway. We just have to make it through this one last stretch of infection and then we can start planning for the expansion in restaurants, retail, entertainment, travel and leisure into 2021.

The good news today is that markets are thinking forward and moving capital into the areas that will benefit. Today we saw 25-40% gains in the cruise ship stocks, 15-20% gains in the airlines, 15% moves in the bank and energy names, 20-40% gains in the office REITs and even a 5% bounce in European equities. Value beat growth by over 500 basis points today. Credit spreads improved sharply—helped by the improved outlook toward energy and real estate assets. This jump in COVID-impacted equity values will allow the companies to raise any emergency capital and then buy them some time until COVID-19 leaves the general population.

We talked about the election results last week in a blog post. Not much new to confirm except that most of the States results look large enough to be final. The split government with President elect Joe Biden taking the executive suite, and the Republicans taking the Senate is good news for equity and credit investors. It means that Congress will do enough to keep Americans away from a recession and banking crisis, while keeping the ‘Blue Wave’ spending and taxation plans in the bottom drawer. So, for two years, the wind should be at investors’ backs. While this initially dampened the outlook for higher interest rates, inflationary pressures and cyclical companies, today’s COVID vaccine news may have trumped it. What I wrote last week still stands: “While many of us may have expected future outperformance in other areas of the market this year under a blue wave, I bet that we will all end up pretty happy with our equity portfolios if our future government ends up doing just enough to keep us out of trouble.”

The lab rats did it…

The scientists at Pfizer and BioNTech take the lead in the race for 2021’s Nobel Prize.

A vaccine developed by Pfizer Inc. and BioNTech SE protects most people from Covid-19, according to a study whose early findings sent stock prices surging and were hailed by the top U.S. infectious-disease specialist as “extraordinary.”

The shot prevented more than 90% of symptomatic infections in the trial of tens of thousands of volunteers, the most encouraging scientific advance so far in the battle against the coronavirus. While the results are preliminary, they may pave the way for the companies to seek an emergency-use authorization if further research shows the vaccine is also safe…

With effectiveness for the first vaccines previously expected to be in the range of 60% to 70%, a rate of more than 90% “is just extraordinary,” said Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, on a call with reporters…

The Pfizer vaccine is being tested in a two-dose regimen. The trial started in July, and since most participants only received their second dose much more recently, nobody knows how long any protection will last.

However, the strong reading from the first large-scale trial to post efficacy results bodes well for other experimental vaccines, in particular one being developed by Moderna Inc. that uses similar technology. Its big trial could generate efficacy and safety results in weeks. If that study succeeds as well, there could be two vaccines available in the U.S. by around year-end…

So far, the trial’s data monitoring committee has identified no serious safety concerns, Pfizer and BioNTech said.


Now that we have a vax, here’s how it will be distributed…

CDC Vaccine Priority Groups

As you would expect, the financial markets are overjoyed with the double shot…

Global equity markets extended their rally overnight was the US Presidential election process draws closer to a conclusion with former Vice President Biden declared the winner by major media outlets. The rally received an added boost as Pfizer and BioNTech announced that Phase 3 results of their Covid-19 vaccine indicate it has a high protection rate of 90% and has no major side effects. Pfizer CEO Albert Bourla said it was the most significant medical advance of the past 100 years. The company stated “Based on current projections we expect to produce globally up to 50 million vaccine doses in 2020 and up to 1.3 billion doses in 2021.” The official results will be submitted next week to the FDA for emergency use approval.

The equity market is facing one of the best backdrops for sustained gains in years. After a prolonged period of elevated risks (global trade war, COVID-19 pandemic, US election uncertainty, etc.), the outlook is significantly clearing up, especially with news of a highly effective COVID-19 vaccine.

The S&P 500 launched higher today…

In addition, the market has printed 80%+ up volume days in four of the last six sessions indicating significant upward buying pressure.


If you need a quick read of COVID in the market, try ZM vs. UBER…

I saw a near 2,500 basis point difference between the two stocks today. There will be many ‘work from home’ and ‘stay at home’ stocks that are going to underperform as the market digests a COVID vaccine. We knew this would occur. Just prepare yourself for some of your most favorite COVID defense stocks to trade lower than you think, while the COVID recovery stocks trade above all of their current target prices.

The Reopening Trade

Nothing else to say but that investors loved last week’s election results…

Voting for Gains


And the rewards for a split government did not just stay inside the U.S. as stocks gained on a global basis and even broke out to all-time new highs…

Tweet from @Schuldensuehner

Senator Mitch McConnell will now take over COVID aid stimulus negotiations with the Democratic leaders of Congress…

Senate Majority Leader Mitch McConnell (R., Ky.) is expected by lawmakers and aides to assume a larger role in negotiations that he had largely ceded to Treasury Secretary Steven Mnuchin. Mr. Mnuchin failed to strike an agreement with House Speaker Nancy Pelosi (D., Calif.) during weeks of talks leading up to the election, and White House negotiators were often out of sync with Senate Republicans.

Mr. McConnell moved swiftly to plant markers this week, urging lawmakers to reach an agreement around a new Covid-19 relief deal before the end of the year. He pointed to data released Friday showing that the jobless rate had declined to 6.9% to highlight the logic behind the Senate Republicans’ roughly $650 billion proposal, far smaller than the $2 trillion Mrs. Pelosi and Mr. Mnuchin had been discussing.

“Our economy is really moving to get back on its feet. That I think clearly ought to affect what size of any rescue package we additionally do,” Mr. McConnell said Friday in Kentucky. “I do think we need another one, but I think it reinforces the argument that I’ve been making the last few months that something smaller rather than throwing another $3 trillion at this issue is more appropriate.”


And Goldman Sachs sees a mini deal of $1 trillion before Forty-Six enters office…

Goldman Sachs


Another positive for the equity markets can be found in the continued strength in Q3 reported earnings…

Following the last big week of earnings, 439 S&P 500 companies (88% of index earnings) have reported. Momentum continued last week – and at this point, 67% of companies have beaten on both top and bottom line, on track to be the strongest proportion of beats since Reg. FD (38% on average) and well above last quarter’s 59%. 3Q EPS rose 1% to $38.08 (-10% y/y), up 16% since the start of October, marking the second biggest beat in history following last quarter’s record beat of 21%. Sales beat by 2%, and net margins (ex-Fins) bounced back to 11.1%, just 11bps shy of one year ago!


Q3 Reported Earnings

J.P. Morgan sees fundamentals as taking over from the macro and is raising its S&P 500 earnings outlook for 2021 by $8 to $178…

Earnings recovery during 2Q and 3Q well ahead of expectations due to unprecedented policy supports, V-shaped recovery in the global business cycle, accelerated growth from long duration tech plays, expense discipline by US corporates and dollar weakness (earnings surprised by 22.7% in 2Q and 22.9% in 3Q). With US elections nearly behind us, we think investors should start focusing on fundamentals, which are likely to deliver above-trend revenue growth and strong margin recovery for the next two years. Also, we view the gridlock outcome as a net positive given it substantially reduces the risk of higher taxes (estimated headwind of ~$14 of EPS), while a more diplomatic approach to global trade deals is likely to yield some second order benefits next year.


Finally, now that we have all drank enough coffee in a week to last a lifetime, here’s how that cost of a coffee flowed…

Q3 Reported Earnings


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