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30 November 2020 / VIDEO

What COVID-19 Vaccines Could Mean for Markets

Executive Summary

The recent news on vaccines was a significant positive surprise for markets that was not yet priced in. If news remains positive, we could see a fast rotation toward small-caps, value stocks, and credit. In a more pessimistic scenario, growth stocks, large-caps, and the U.S. could continue to drive markets.

Transcript

The Pfizer and Moderna vaccine news were significant positive surprises for markets. These developments, with 95% efficacy and good distribution capabilities, were not priced in. We had been tracking probability forecasts for 25 million doses to be ready before March of 2021—this is produced by a group called the Superforecasters—these probabilities jumped from about 50% to 88% just on the Pfizer release.

So we saw the market react. The pandemic will continue to be perhaps the most important theme driving markets and the economy for the next six to 18 months.

In that context, as asset allocators, we no longer just start our discussions with the usual question: Are we risk-on or risk-off? Now we add a second question: COVID-on or COVID-off?

In COVID-on, growth stocks, large-caps, and the U.S. stock market may be poised to continue to outperform value, small-caps, and non-U.S. stocks. In COVID-off, we could see a very fast great rotation, in favor of the more typical economic recovery trade that tends to favor small caps, value stocks, credit, and so on. And we saw a preview of this in markets over the last few weeks. As asset allocators with a six to 18 months horizon, we are positioned for this recovery trade with long positions in small-caps and value stocks, for example.

Nonetheless, the path to a vaccine will be rocky. The pandemic is getting worse, and lockdown measures are starting again. We expect a lot of volatility in shorter-term data for economic growth, unemployment, and, of course, in financial markets. In our Asset Allocation Committee discussions, we’ve been debating the distinction between the path and the destination. The path is uncertain, but our view is that the destination is much more certain.

We will get through this pandemic. COVID-off is the destination. In the meantime, we will need stimulus to provide the bridge, and markets will remain fragile, which could provide multiple entry points for investors to continue to use their cash on the sidelines to lean into risk assets.

*Source of vaccine probabilities: Good Judgment Inc. Optimistic probability for a vaccine is defined as before 3/31/2021. Pessimistic is defined as expected after 3/31/2021. Increase in optimistic probability referenced occurred 11/9/2020.

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