Investors See Light at the End of the Covid Tunnel

When Pfizer declared a 90% effective Covid vaccine this week, the mask wearing world bought recovery stocks with reckless abandon. Investors see the vaccine light at the end of the Covid tunnel. Short term we are still in the dark tunnel of winter that is already witnessing reduced consumer activity with almost zero economic growth over the net few months unless new Government trillions to vaccinate checking accounts arrive. However, confidence in a Covid cure in 2021 and an eventual Government stimulus package,  will bring light to the approaching darkness and allow the nation to leave the safety of their Covid free homes. Short term pain this Winter is expected to lead to long term gains next Spring and beyond. Pfizer will not be the only successful vaccine to be announced in 2020. Each new blockbuster Covid cure will accompany another tranche of investment dollars propelling the beaten down value/recovery stocks higher. The likely 5 month delay in approving and starting distribution of Covid cures to the masses mean more Government Stimulus will be needed and more Central Bank printing of money to keep credit cheap and abundant.

Does it matter who is President of the United States? For stock investors it usually doesn’t matter significantly. There are differences between Trump and Biden. Trade Wars vs appeasement. Free markets and low taxes vs high taxes, more regulations and fiscal stimulus. Investors know that our capitalist enterprises seek to operate as an adhocracy, innovating to grow despite who is President. Stocks rallied in the days before the November 3rd election on the assumption of a Blue wave sweep of the White House and the Senate with a blank check stimulus budget. Then stocks rallied during the vote count when the odds completely reversed to favoring a pro business Trump victory. Later on election night the oddsmakers once again reversed course favoring  Biden to win with a GOP Senate and stocks rose even further. All outcomes seemed destined to propel stocks higher simply because they know not to fight the Fed’s unlimited printing press and Government stimulus that will be employed to sustain the expansion. While we would warn investors that a runoff election for two Senate seats in January can still generate some brief shockwaves, for now stock investors are locked onto the presumption of a Biden victory that is restrained by a Republican Senate with guardrails preventing extreme policy actions.

What the market does care about is Covid, its cure and Government handouts. Investors want to know when a vaccine will provide clarity on the timing of a normalized Covid free economy. This weeks announcement by Pfizer of better than expected results form its phase 3 Covid-19 vaccine trial should not have been a major surprise, but investors used the news to build confidence in a more robust 2021 and begin investing in depressed recovery stocks. For months there has been a consensus that thousands of businesses that survived operating at 50 to 100% less sales volumes would eventually return to almost normal in 2021 with these depressed stocks soaring 50% to well over 100%. However, the lack of clarity on timing and who might declare bankruptcy have kept these sectors in hibernation mode, living on Government handouts and the Fed’s cheap credit.

Optimism is high longer term, with investors willing to look past the short term pain and wait for long term gains. Many service and contact oriented companies are likely to descend from bad sales to even worse this winter, yet stock buyers are willing to pay a premium valuation for a perceived return to normal in 2021. Such optimism isn’t entirely irrational looking at 60% fewer air passengers that will definitely return to their normal travel and leisure destinations when the economy open. Boeing plane production will rise and new routes will be added by carriers as hotel bookings fill up next year. These recovery stocks still must deal with the reality of the next few months of escalating Covid hospitalizations triggering isolated lockdowns and fear of physical contact, but markets know the Airlines are not going bankrupt.

Covid’s arrival was subitaneous and Tech investors responded with premium bidding throughout 2020. Now growth investors will need to be increasingly selective as the proximity of a Covid cure is shifting some Tech fund flows to recovery stocks. Major industrial behemoths like Boeing will clearly return to profitability and far higher production volumes as the 737 Max finally enters service and as the economy opens up. Although Boeing has almost doubled from its March abyss, it has a long runway to reach pre-pandemic levels. Travel and leisure led by hotels may soon join the valuation upgrade list despite a very tough winter ahead.

While tech centric businesses are almost universally growing rapidly during this ongoing pandemic, the industrial sector is finally showing a strong rebound in late 2020 with restocking of inventories as product turnover has improved dramatically from Q2. Clear slowing in mobility tracking of consumers in Europe and the US should slow this recovery short term, but pent up demand is still growing for a sustained expansion later in 2021 when the pandemic fear is behind us.

Cheap credit and the exodus of failed businesses in the service sector are inspiring optimism to form new companies with a firmer foundation for the new expansion cycle.  Schumpeterian economics would indicate robust new business and business replacement cycle continuing well beyond the post Covid reopening phase expected in 2021. Excess liquidity, artificially depressed borrowing rates and pent up deal demand should also keep Mergers and Acquisitions rebounding from their Q2 nadir in a strong uptrend until the economic momentum peaks in late 2021 or 2022.

The stock market is currently testing the upper end of its 10 week trading range for the third time since September 2nd. While the longer term picture remains ebullient, the current uptrend in equites may reverse near mid November from new record highs and begin to correct into the first half of December as consumer mobility slows from the pandemic with new record Covid hospitalizations in the US and Europe before winter has even begun. Yet markets are forward looking to the explosive tailwinds of Fed Quantitative Easing and Fiscal stimulus in 202o and 2021. Stock valuation declines are expected short term as the economy slows, but the high confidence that exogenous outcomes from the pandemic will soon subside will keep an anxious bid under the market.

 

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