Covid-19 Surge At Odds With Vaccine Optimism

Picking Winners In The Vaccine Trade:

With a majority of the election uncertainty now behind us, markets have refocused on Covid-19 and its economic impact. In particular, positive vaccine news from Pfizer PFE and positive treatment news from Eli Lilly have given investors hope that soon Covid-19 will be behind us completely.

While we appreciate the optimism, we’re cautious and would encourage investors to act likewise. Yes, now is the time to be positioning yourself for next year and for a resumption of normal business. But with Covid-19 surging across the United States and the repercussions of mass voting and holiday travel yet to be seen in Covid-19 numbers, we expect there to be significant volatility along the way.

Understanding Covid-19 and Vaccinations:

Take this with a grain of salt – we aren’t doctors after all – but the Covid-19 second wave is in full force and has the potential to be significantly more serious than the first wave we saw in April and May. Despite positive vaccine news, we’re still not expecting a resumption of normal activity with the virus in the rear view mirror until mid 2021. If anything, local shutdowns appear likely in some parts of the country.

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Case numbers are rising quickly across the Midwest and the rest of the country is not far behind. Colder weather is pushing people indoors and furthermore, while we would expect holiday travel to be muted relative to last year, any increase in travel will make the virus harder to contain. We also anticipate lower compliance with Covid-19 safety guidelines as the year continues and people suffer from Covid-19 prevention fatigue.

It’s also worth noting that while the vaccine news from Pfizer about 90% efficacy is incredibly encouraging, it’s also still a ways away from being a permanent solution. Manufacturing capacity for the vaccine suggests it will be mid 2021 before we have significant vaccination within our population. Furthermore, the high degree of complexity in logistics for the Pfizer vaccine – it requires ultra cold storage – means that even once production has ramped up, it still may not be a viable global solution.

Fortunately, there are other vaccines in the pipeline that will probably overcome that hurdle and will help ease manufacturing constraints, but again, this means that we’re probably still looking at mid 2021 for a resumption of normal business with the potential for more economic damage between now and then.

Politics Muddies The Waters:

Trying to gauge how a second Covid-19 wave impacts markets is complicated by the political situation in the United States. The recent elections, while not completely settled, will likely result in a split government with the Republicans retaining control of the Senate while the Democrats take the presidency.

Split governments are generally good for markets as they encourage centrist policies and generally slow down legislation, giving companies more time to adapt. We saw markets get a bump immediately following the election. However, the split could also delay stimulus packages to aid businesses negatively impacted by Covid-19.

Investors should watch this space closely as we deal with a second Covid-19 wave as hold-ups in delivering a stimulus package could really hurt the US consumer.

How to Position for the Surge:

If you have cash on the sidelines, any surge in Covid-19 cases could be an opportunity for you to put that cash to work and buy companies opportunistically.

The first surge’s winners were tech companies that could thrive during quarantines and downturns. Some of them now trade at ridiculous prices, but there are others that could still have legs. Names that are building digital brands and direct to consumer channels should continue to excel – think about companies that have a strong brand or consumer niche, like Chewy or Amazon AMZN , who are taking advantage of people being home to ramp up sales.

On the other hand, beware some of the fad names in technology. We’ve seen a lot of companies skyrocket over promises for the future, but without having the earnings growth to back up the hype. These companies might get a bit of momentum if we get another set of shutdowns, but don’t be tempted to chase them.

Instead, focus on companies that are building durable advantages and taking market share during the downturn, or even better yet, spend the winter taking advantage of volatility to reposition your portfolio for a resumption of normal business a few months from now.

Expect Volatility and Recovery:

The bottom line is that this is going to be a tough winter. The Covid-19 surge and divided congress could really leave the American Consumer in a tight spot. But, it will pass. Just like the first wave, it will pass. So hang on, reposition, take advantage of the dips to get names you like at a discount. It’s going to be a hectic holiday season and maybe we can’t all be with our families the way we’d like, but brighter days are coming.

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