Vaccine Causes A Frenzy
Monday was the craziest factor day of the year. It was one of the craziest factor days ever on multiple fronts. Even though the action was shocking, it’s what you’d expect given the news. Prior to Monday, the COVID-19 situation looked grim. Currently, there are 59,275 people in the hospital because of COVID-19. A summer peak of about 60,000 will be crushed this week. We know November and December will be very bad.
However, the outlook on 2021 has improved remarkably now that we have a vaccine from Pfizer which was proven 90% effective. It’s well above the minimum effectiveness necessary to be accepted by the FDA.
Furthermore, because of its similarity with the Moderna vaccine, that one also might be effective which means we will have two big healthcare companies producing vaccines. That means we will get enough vaccines quicker. Furthermore, the FDA gave Lilly’s therapeutic an emergency authorization.
This is for early detection of COVID-19 to prevent it from getting worse. We have the perfect one two punch to eliminate COVID-19 next year and allow life to get back to normal by the spring or the summer.
Mega Factor Move
At first almost all stocks rallied in reaction to the vaccine news, but then we started to see the market get pulled apart. S&P 500 had a brutal close as it was only up 1.17%. It fell 2.31% from its morning high. Industrials, financials, and energy did well while the momentum tech stocks were crushed.
Anything that has done well in the past few months and relies on low rates was hit hard. For example, Peloton fell 20.3% and Zoom fell 17.4%. The bubble finally burst.
As you can see from the chart below, Bloomberg’s pure momentum portfolio had its worst return ever (since 2008). Some would never invest in this type of basket because you have no idea what you’re getting. It wasn’t just tech stocks that fell.
Clorox fell 10.6% and Rollins (pest control) fell 9.6%. Clorox is already down 18% from its record high in early August. Many wouldn’t invest in it until it falls another 18%. It needs to give back all its COVID-19 gains because normal usage will return starting in about 6 months.
Some investors were shocked to see their favorite FAAMNG stocks down. That shouldn’t be a surprise even though technically many of them would rather the economy recover. Facebook relies on ads from small and mid sized companies who would rather the economy be strong than weak.
On the other hand, Instagram is used more when people are stuck inside. It’s a catch 22. The market doesn’t care about the details of the fundamentals. It supported FAAMNG during this rally. Now, it is throwing those stocks away. As you can see from the chart below, FAANG+’s return versus the market was the worst ever. This goes back to late 2015 when the term was coined.
Energy & Banks Win
Specifically, energy and financials had monster moves, while tech lagged. Tech may even have much more room to fall. Cyclicals have room to rise, but some investors are more focused on the downside now that the S&P 500 is almost at its record high.
Can this really be a triple top? That’s possible because we could see the high fliers that control the market fall back down to earth. Nasdaq 100 fell 2%. This decline makes it look like it will have a very tough time surpassing its September 2nd high. Personally, I don’t think it will breach that high for several quarters.
Cloud index was down 4.9%. Its chart looks a lot like the Nasdaq 100. Zillow stock fell 12.1%. It has much more room to fall as rates rise. One of the only high flying stocks to do well was Nio which rose 5.7%. This is the hottest stock many have ever seen and the most overvalued. They only sold about 3,500 cars in July, yet it is valued at almost twice the market cap of Ford. Tesla fell 2%. Its August 31st peak will likely never be breached again.
On the positive side, the energy index was up 14.3% which was its 3rd best day in its 25 year history as the chart above shows. Its best day was earlier this year. This has been quite the crazy year! Oil services ETF was up 18.9%. Banks did almost as well as the regional banks were up 15.4% which was the 2nd best day ever.
Huntington Bancshares was up 17.7% and Zions Bancorporation was up 23.9%. Because of all this amazing action, the small cap index was up 3.7% and the small cap value index was up 7%.
Crazy Bonds Too
TLT long bond index hit a 6 month low as it fell 2.1%. 10 year yield rose from 81.5 basis points to 93.5 basis points which is the highest since March 19th. A prediction for the 10 year to get to 1% is almost true. Next target will be 1.5%. This is great news for the banks. Since the Fed is keeping rates low, the yield curve is steepening as the chart below shows.
102year CHART
We are still about 200 basis points of steepening away from the cycle peak. The curve should stay steep for a few years because the Fed won’t hike rates soon. Looks like the market started to price in a hike in 2024. That’s the first expectation we have ever seen for a hike this cycle. With commodities prices spiking, we could see more inflation.
Plus, the labor market will get dramatically tighter when the economy reopens and the leisure/hospitality industry gets back to normal. We are extremely far away from a full labor market now, but we could get there in record speed in the next few months. This has been a very quick recovery. It wouldn’t shock me to see the U6 unemployment rate fall below 8% by the end of next year.