Divided but Vaccinated: With Two Promising COVID-19 Vaccines, Split Government Doesn’t Look so Bad for US Market
Experts at BlackRock and the Progressive Investors Network examine the state of the US markets after a chaotic election and a resurgent COVID-19.
It has been more than eight months since the COVID-19 outbreak shut the US economy down. Since then, there have been widespread efforts to combat the virus and reopen the economy. However, as the colder weather has made outdoor and socially distanced activities less appealing to consumers, we’ve seen a record uptick in the amount of cases in the US.
As a result, many states that had previously made significant advances in reopening their economies in time for the holiday season are now heading back towards lockdowns and more aggressive countermeasures to combat the virus. However, November has brought with it a few positive developments that are already pleasing the US Market. More on that below.
Last week, we teamed up for a second time with experts from BlackRock and Progressive Investors Network to examine the state of the US markets after a chaotic election and a resurgence of COVID-19. While we weren’t able to record the briefing for security and privacy reasons, we wanted to share some key takeaways from the call as well as further reflection on the topics.
#1: The US elections didn’t shock the market as much as was expected.
Although the presidential election was chaotic and a winner was not declared until five days after Election Day, stocks rose just one day after polls closed. That was — as Kurt Reiman, Managing Director of BlackRock told us — because the markets had anticipated a greater shift in party balance and potential civil unrest on election night as results came in. It came as a relief to the markets then, that neither of those predictions came true, with an increased likelihood of a split government as Republicans are expected to maintain control of the Senate and Democrats retained their majority in the House.
#2: COVID-19 vaccine breakthroughs are more important to the markets than a united government.
Reiman stressed how important Pfizer’s vaccine breakthrough was for the markets, and how despite a tumultuous presidential election, the news that Pfizer’s initial vaccine trial was 90% successful in reducing the risk of contracting COVID-19 was all the markets needed. This week a second company, Moderna, announced that preliminary data from their vaccine trial showed 94.5 percent effectiveness against COVID-19. Once again, the stocks soared, with the Dow and S&P 500 posting record high closings. So in short, even in the face of a split government, stocks will rise as long as there are solid advances in the fight against COVID-19.
#3: Getting the market to reflect 2019 levels of growth might take until 2022.
With the news of the exciting vaccine developments still so recent, the market is acting as if we’ve seen the end of COVID, Reiman pointed out. While he agrees that some of the more dire outcomes have been priced out, he wants us to remember that YTD performance in some of the most hard-hit sectors like hospitality, travel, and energy is still looking really rough. What has been most affected by COVID has not yet fully recovered, and may never fully recover. So while the market is hopeful, the road to recovery for the market doesn’t look like a short one.
#4: 2020 is a buying opportunity.
When looking at the rest of this year and into next year, Reiman and BlackRock are moderately pro-risk. Part of the reasoning behind that is that central banks will remain accommodating, as they don’t want to fight the Federal Reserve. Risk assets have done well over the years because of the decline of interest rates, and there’s not a lot more room for rates to fall.
The markets will survive this, as indicated by bond yields in the US, the S&P 500 dividend yield, vaccine prospects, and a smaller relative loss compared to 2008. It’s not pretty, but there is decreased uncertainty and increased hope for the economy to reopen. As such, through the end of this year, there’s a buying opportunity, and Kurt recommends picking quality and smaller-sized companies to invest in.
Thanks to Kurt Reiman and Chad Brown of BlackRock for their excellent remarks and to moderator David Long of PIN Boston for guiding us through the complex and insightful discussion.
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