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Call it a relief rally because investors had much to be relieved on Monday.
Stock index futures were already on the rise after Democrat Joe Biden was cast as the winner of last week’s presidential election over the weekend – virtually eliminating a source of uncertainty. Then Pfizer Inc. and BioNTech announced early Monday what was definitely good news about their COVID-19 vaccine, and a classic example of a “risky” rally was underway.
But analysts have warned against over-reading election and vaccine news, warning that some big unknowns remain to be resolved.
‘Unanswered questions’
“It’s worth letting the dust settle after today’s big moves. There are risks with every rally, ”said Lindsey Bell, chief investment strategist at Ally Invest, in a note.
“And while we think the vaccine news is very positive for the market, there are still many unanswered questions. One of those questions is how long it will take for a vaccine to become available to the masses. We could still be months away from the end of the pandemic, and COVID cases in the United States are on the rise, ”she said in a note.
Lily: BioNTech and Pfizer say their COVID-19 vaccine candidate is 90% effective, a much higher benchmark than expected
The Dow Jones Industrial Average DJIA,
increased over 1,500 points in early action like him and the S&P 500 SPX,
climbed into record territory, before slashing gains at the end of the day. The Dow Jones still recorded its biggest single-day percentage gain since June.
And some sort of rally seemed justified, analysts said.
In progress
The reaction to the vaccine news “has rightly exceeded recent efforts to cripple the size and timing of a US stimulus package,” Christopher Smart, chief global strategist and director of the Barings Investment Institute, said in a statement. email.
“Even though the growing number of cases has triggered modest news restrictions in the United States and Europe, the baseline scenario remains that vaccines and improved treatment will bring the pandemic under sufficient control to enable the economic activity to pick up in the first half of next year, ”he said. . “It may or may not be this particular drug, but more are still in the pipeline. “
But some investors believe market players have gotten ahead of themselves, looking beyond economic uncertainty that has not been fully dispelled despite election clarity and the prospect of an effective vaccine. .
“The vaccine result clearly gives hope that a return to normality is within reach, and while this is hugely positive for markets and businesses, we must keep in mind that the economic impact of the pandemic is still being felt around the world, ”said Laith Khalaf, analyst at British broker AJ Bell.
“Often, the initial instinctive reaction of markets to big events, positive or negative, is an overreaction, which is tempered over time,” he said.
‘Drip’
Khalaf said investors should be prepared to “pump” money into the market in the event of a dip, but should not be in a hurry to get rid of safe-haven assets entirely, which may have turned into “bloated” holdings in some. wallets.
Investors have pushed up the shares of companies that have been among the biggest losers in the pandemic – airlines, cruise ship operators, movie chains – and dumped the biggest winners, like the work-from-home mainstay Zoom Video Communications Inc. ZM,
and intelligent exercise equipment manufacturer Peloton Interactive Inc. PTON,
The weakness of tech stocks that were the main beneficiaries of the homework phenomenon led to the Nasdaq Composite COMP,
at a loss of 1.5% by the closing bell.
These moves are in line with calls in recent months to add value or cyclical stocks, which could shine as the economy improves, to portfolios, Bell said. Meanwhile, there might still be a good long-term case for the technology, “but it may not overtake the rest of the market like it has since March,” she said.
The long-suffering S&P 500 energy sector jumped more than 14% to lead the increase, with financiers the second biggest winner with an 8.2% increase. The high tech and communications services sectors lagged behind, falling 0.7% and 0.3% respectively, while the consumer discretionary sector gained the upper hand with a decline of 1.0%. 6%.
Traditional havens like Treasurys and gold sold strongly. The US dollar DXY,
however, rebounded in volatile trading after initially selling.
Stimulation issues
And there is also the possibility that positive news on the vaccine front, and the accompanying stock market rally, will cool the campaign for another round of heavy pandemic relief spending from Washington, officials said. analysts. The prospects of another big spending cycle were already in question, with Democrats looking unlikely to take control of the Senate.
This could be a problem, some analysts say, with increasing COVID-19 cases in Europe and the United States threatening the global recovery. Several European countries have put more stringent restrictions in place, while the number of new daily cases in the United States has reached a series of records.
“In the meantime, rapidly rising case and hospitalization rates underscore a growing fundamental risk to stocks and the prices of other risky assets if a budget deal is delayed or of disappointing magnitude,” Lauren said. Goodwin, economist and multi-asset portfolio strategist at New York Life Investments, in a note.
For now, however, policymakers may have some leeway after a stronger-than-expected October employment report, which was also seen to reduce the prospects for a major spending package. Goodwin said she remains “constructive” in the market, but sees the potential for “short-term speed bumps.”
“What could change that story is the resurgence of COVID infections and, more importantly, hospitalizations,” Goodwin said. “Both are increasing as the weather gets colder and are already contributing to the deterioration of the service sector and small business employment. A rapid deterioration in the health and economic situation could lead to additional – or faster – budget support. “
Barings’s Smart also warned that the pace of next year’s recovery will always depend on a US budget response, “which will be more difficult with a divided government and a Republican Party that finds its bearings in a post-Trump world.”
“It may make political sense for both sides to rush the package through the ‘lame duck’ session of Congress, especially as government funding will soon be extended beyond early December,” he said. he declares. “But in any case, the magnitude of the US fiscal stimulus next year should not come as a surprise from above and it remains a risk. “
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