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Vaccines, Senate Runoffs and the Markets

 

With good news on the COVID-19 vaccine front and much—though certainly not all—of the election uncertainty behind us, there’s been plenty for the markets to digest over the past few weeks. But considering that the good news has been tempered by a surge in new COVID-19 cases across the globe, what should investors consider moving forward?

To gain some perspective about how these events are shaping the market, I recently spoke with George Farmer, Managing Director, BMO Capital Markets, and Yung-Yu Ma, Chief Investment Strategist, BMO Wealth Management. Following is a summary of our discussion.

Vaccines and the Market 

The S&P 500 staged a rally in November. The usual “pandemic play” sectors—information technology, communication services and consumer discretionary—have performed well. But what’s notable is that the sectors that had been lagging through much of 2020—energy, financials, real estate and industrials—have been among the big leaders in November. These are economic-sensitive, cyclical plays, and one of the factors driving the significant traction they’ve gained is the strong vaccine news that’s emerged over the past few weeks.

Vaccines from Pfizer and Moderna are both in phase 3 clinical trials, and interim analysis from both companies indicates their products are about 95% effective. Emergency use authorization could allow for distribution to health care professionals and individuals categorized as high risk before the end of the year. That’s driving optimism about the economy’s prospects in early 2021. Farmer, who covers the biotechnology sector, said the results from these companies also bode well for other vaccines in various stages of development.

Farmer expects the vaccines to be available to the general public by mid-2021. But that leads to the question of whether there will be sufficient quantities available for anyone who wants a vaccine. “Both companies have said about 20 million doses will be ready by the end of this year, [and] close to a billion doses each by the end of next year,” Farmer said. “That's really quite amazing.” 

Vaccine developments are also providing a boost to emerging markets. Ma noted that China has four vaccines in phase 3 trials, and that could have significant economic impacts beyond that country’s borders.

“A lot of emerging market countries have signed on for China's vaccine,” Ma said. “We do expect positive news out of those vaccines, and for that to benefit countries such as Indonesia, Brazil, probably India as well. So we do expect that to be taking place globally.” 

A Resurgence in Cases

While the news has been good on the vaccine front, virus cases have staged a major resurgence around the world, which has led to another round of business restrictions—if not outright shutdowns—in many regions. Despite cases surging to record levels in the U.S. and much of Europe, the market so far has focused on vaccine optimism.

That optimism, according to Ma, is what is helping to hold the market together amid the virus resurgence. “The vaccine news is helping provide investors a way to sort of see past this and maintain the relatively stable equity market that we have today.” 

COVID Vaccines as Commodities 

While the vaccine developments are unequivocally positive news, Farmer noted that other issues remained unresolved. "Do you need a booster shot? Moderna’s and Pfizer's vaccines have to be administered in two doses 30 days apart. With these other vaccines you may just need one shot. And if you're thinking about inoculating enormous patient populations, that may have its advantages.” 

As more data becomes available, Farmer said we’ll have a better idea of how to manage the virus—and he believes it will have to be managed for the foreseeable future. 

“There's a lot that we're going to learn over the next year,” he said. “We're starting to think about, at least from an investment perspective, how are these things going to ultimately be sold commercially on a retail-based network beginning, say, in 2022 or ’23. Because COVID isn't going to go away. It's going to be with us for decades, and it's going to be something that's ultimately going to have to be managed, just like the flu is managed. 

Lingering Senate Implications

While much of the political uncertainty is behind us, the elections will continue to have an impact on the market—particularly the Jan. 5 runoffs in Georgia, which will decide the balance of power in the Senate.  

Ma noted that prior to Election Day, prediction markets expected Democrats to take control of the Senate. Since then, odds have flipped strongly in favor of Republicans maintaining Senate control.

“This filters in the markets because should the Democrats be able to take control of the Senate in both those seats, we would expect some changes,” Ma said. “We would expect greater fiscal stimulus, but we would also expect tax increases.” 

Should the Democrats sweep of both Georgia seats, a 50-50 split Senate would have tie-breaks decided by Vice Presidential vote.  But Ma pointed out that because Republicans gained seats in the House of Representatives, bringing that chamber closer to a balanced level, that would also moderate how far Democrats could push the envelope on any proposed tax increases. Meanwhile, if Republicans hold on to their Senate majority as currently expected, Ma still believes another round of stimulus will pass. 

"The COVID resurgence probably lends extra impetus to a stimulus package,” he said. “We do think that's going to be favorable to the markets as well. The timing, of course, is uncertain, but perhaps around year-end, if not shortly thereafter, we do expect that to come, and also to help stabilize the markets.”

In addition to these topics, we covered a lot more ground in our discussion, including a look at interest rates, inflation risk and our updated asset allocation recommendations.

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Michael Stritch, CFA Chief Investment Officer, BMO Wealth Management - US



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