In this blog we will discuss how COVID-19 impacted 2020 stock market trends, and the issues surrounding the question of whether the vaccine is likely to reverse pandemic stock market trends in 2021.
The COVID-19 Pandemic hit the US and global financial markets almost by surprise. What was considered perhaps somewhat disdainfully as a local Chinese issue was suddenly observed to be anything but.
In this article, we will discuss:
- Market sectors impacted by the COVID-19 pandemic in 2020
- The chances of the vaccine reversing pandemic stock market trends
- The vaccine’s impact on the global economy, the market, and its sectors
- Our general assessment of the road to recovery in 2021
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Market sectors impacted by the COVID-19 pandemic in 2020
In March 2020, markets sold off sharply; and in the aftermath from April through October stocks recovered, helped by a massive and unprecedented liquidity infusion by the Federal Reserve, lower interest rates and other government stimulus programs. Much of the moneys earmarked for small businesses did not reach their targets and found their way into the US stock market.
However, this recovery was uneven, and the market bifurcated into sectors that would either benefit or continue to grow owing to the consequences of the pandemic, and those that would not. The former focused primarily on the “stay-at-home,” “work-from-home,” and “finding the cure” themes, and manifested itself in the rapid growth in providers of:
- online work solutions
- cloud-computing
- video streaming and cyber-security services
- online retail
- e-sports and at-home entertainment
- pharma and biotechnology
- other service providers
On the other hand, airlines, hotels, cruise lines, energy companies and certain real estate sectors such as office REITs suffered.
The vaccine’s impact on the market and sectors in 2020
People got used to working and being entertained at home, while huge sums of money were dedicated to the development of vaccines against COVID-19 and other related activities and developments.
The next milestone was just after the US presidential elections, when on November 8th, both Pfizer and Moderna announced they had developed vaccines with over 94% efficacy. Stocks of many of the out-of-favor sectors rallied sharply that day, some by over 25%. And we did see outperformance of small and mid-cap stocks across more traditional sectors, in anticipation of a recovery from the COVID-19 pandemic and a return to normalcy.
How soon would the impact of the vaccines likely be felt in stock market?
At the time of this writing, we are now two months on and the reality is a little more complex. The vaccines have now been approved by the FDA, and are starting to be administered. However, at the same time, we are going into winter, which is traditionally a time where viruses spread more easily.
The lame duck political environment is also making it harder to implement effective containment policies. Infection rates are rising rapidly at a time where there may be some light at the end of the tunnel.
But this light still looks far off.
The possible impact of the vaccine on the stock market in 2021 is unknown
At the time of writing, the US can administer 200,000 vaccines per day. This is an insufficient pace if we are to reach the goal of vaccinating 20 million people per month. For comparison, Israel (with one thirtieth of the US population, or 9 million people) is vaccinating over 100,000 persons per day. The vaccine is a two-stage procedure; and we are still so early in the process that no one has received their second dose. In other words, we are yet to see its effect on reducing the infection and death rate.
What has the effect been on the market and the economy, and how do we see things in the short-to-medium term?
The question of whether or not to invest in COVID-19 recovery sectors should be weighed cautiously
First of all, the initial enthusiasm of a return to normalcy has now been delayed. Workers have overall not been given “return-to-office” dates yet, and in some cases this has been postponed for another six months. Also, while people are traveling for vacations to some degree, activity is still far from normal.
As such the rally in some of the old economy sectors has petered off a little, and there has been some rotation back to technology names. The initial discussion in early November was to identify “recovery sectors,” in anticipation of the return to normalcy.
But it may in our opinion still be a stretch to invest in airline, cruise line or hotel stocks at this time, where we are not yet seeing a return to more normal booking numbers. The key is the timeline to the recovery, which as mentioned is now less certain.
The question of whether the vaccine is going to reverse pandemic stock market trends
As an investment advisor, we cannot build an investment thesis based on a specific recovery timeline. While there are investment opportunities in the current environment for the vaccine to reverse pandemic stock market trends, we would prefer to invest in recovery stocks once we see a clear trend in place, even if we miss the beginning of a potential rally.
This was our approach in March 2020, as we sought to learn which sectors would lead the market recovery. One can always buy larger positions at a later stage, when one has more evidence of a trend rather than aim to speculate earlier on.
The airlines will fly again, but we don’t know exactly how things will work out for current shareholders. A major risk to the economy and to certain market sectors is that the longer the recovery is delayed, the greater the number of businesses that will endure financial stress. It is yet to be seen to what degree companies will default on their obligations, even in the current low interest rate environment.
Conclusion
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Norman H. Chait, CFA Managing Principal, Nardis Advisors LLC, December 31st, 2020
Disclaimer: Nardis Advisors LLC (“Nardis”) is a Registered Investment Advisory Firm regulated by the U.S Securities and Exchange Commission in accordance and compliance with applicable securities laws and regulations. Nardis does not render or offer to render personalized investment advice through this medium. The information provided herein is for informational purposes only and does not constitute financial, investment or legal advice. Investment advice can only be rendered after delivery of the Firm’s disclosure statement (Form ADV Part 2) and execution of an investment advisory agreement between the client and Nardis.
