Free | Global Macro & Strategy

The market recovery vs the COVID tug-of-war

The last couple of weeks have featured plenty of good news for risk assets. Whilst the reduction in political uncertainty in the US certainly helped, the big mover has been the vaccine news. The Pfizer announcement, followed by the Moderna announcement last week around the efficacy and safety of their respective vaccine candidates propelled the Dow Jones index in the US to all time highs, with the ASX 200 also putting in strong moves to bust it out of the sideways trading range it had been in for months.

Downtrodden sectors come to life

More specifically however, was the outperformance of the sectors which have been downtrodden due to the COVID pandemic. In aggregate, Banks are the biggest holdings in SMSFs so the big bounce in that sector has been well and truly welcomed by SMSF trustees. Energy has been up big with mid double digit moves, as have property trusts (REITS) and Communications (members can see the weekly ASX Sector Summary for more info and charts). Obvious beneficiaries such as travel stocks had a big initial gain, but have gone sideways since.

The theme with all of these moves is that the market is prepared to look through the short term risks that are still very real, and focus on the fact that the high effectiveness of these vaccine candidates means that a return to “normal” is now a probable, realistic scenario and the light at the end of the tunnel is now in view.

The key was how the market would react AFTER the initial bump of the vaccine announcements. Whilst the past week has been somewhat more subdued at the index level (as would be expected), the fact is banks have had another ripper week , and energy is also up strongly again. Travel names are up and importantly haven’t given back the big gains from the initial jump. Commodities are up, copper is up big, as is iron ore. These are all “reflation” signals from the market, and is a positive for the narrative that this firmer footing can be retained into the future.

Australia in particular appears to be in good shape, with the Treasurer last week announcing that the economy is actually recovering faster than they expected. This was backed up by bank CEOs talking at the AFR Banking & Wealth Summit about how they are seeing a significantly improving environment and the need to upgrade their forecasts for next year. The bank sector responded in kind with a +8.69% move over the week.

The threats

The immediate threat to all this bullish news is the fact that the COVID virus pretty much remains unchecked in the US and Europe, with a growing number of states in the US going back into various levels of shutdowns as the virus spreads. The number of US deaths has risen above 250,000 now, and the closure of schools again in New York was a reminder that the ‘here-and-now’ is still a problem until a vaccine can actually be passed, manufactured, and rolled out in sufficient numbers to make a real difference.

Adding to this was the narrative that the US economy may be in danger of stalling here, as jobless claims in the US came in higher than expected. Even now as we are several months removed from the initial CVOID shock, the weekly jobless claim are historically very high. However, the markets have become somewhat numb to these numbers, with the assumption that the Fed and the Government will just crank up more liquidity and stimulus to plow on through.

The bottom line

The vaccine is a game changer, especially at the sector level, and the resilience of the gains seen in those sectors since the announcements suggests the market is looking through the valley and believes a return to normal is now at least in sight. Add to this the fact that both monetary and fiscal settings both in Australia and around the world are on ‘full throttle stimulus”, and the result is a very favourable environment for risk assets. It wont be smooth sailing though, as various risks come to the forefront and while COVID is still in the ascendency in the northern hemisphere . The new US administration will also need to get on the front foot with a new fiscal stimulus package. For more detail, charts, and asset class updates, members can go to the weekly Portfolio Strategy Update.

Author: Graham Parkes

Issued by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec).

Warning: Past performance is not a reliable indicator of future performance. Any advice is General Advice without considering the objectives, financial situation and needs of any person. Before making a decision read the PDS and consider your financial circumstances or seek personal advice.
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