The stock market-Covid disconnect
EDITOR'S NOTE
If this subject line seems familiar, it's the exact same one I used just over two weeks ago. That Monday morning, even as I was writing, stocks started steeply selling off. Perhaps the disconnect is narrowing, I thought, as the piece went out.
Indeed, the Covid news over the past two weeks has only gotten worse. Not only are cases spiking, but hospitalizations are too. "We need to start discussions about how we preserve health system capacity," former FDA head Scott Gottlieb tweeted yesterday, especially given that this time around "it will be harder to backstop hospitals given how distributed the pandemic is."
To my ears, that sounds like shutdowns. (Although that's not what Gottlieb is recommending.) Shutdowns sink the economy, markets crater again as they price that in, etc. So why isn't that happening? The S&P 500 is up 172 points, or 5%, since the close on that Monday, Oct. 26.
Some are, in fact, betting we're in for a redux of March. Bill Ackman, who turned $27 million of credit-default swaps (i.e., insurance against corporate defaults) into a $2.6 billion profit as markets tanked this spring, is doing the same thing again. "What's fascinating is the same bet we put on eight months ago is available on the same terms as if there had never been a fire and on the probability that the world is going to be fine," he told a Financial Times conference on Tuesday.
"I hope we lose money" on it, he added. But Ackman thinks Pfizer's Covid vaccine breakthrough is actually bearish for markets in the near term as people may get even more complacent about mask-wearing and social distancing. I also wonder if the vaccine makes officials more likely to pursue shutdown measures now since it will, hopefully, be the last time before the vaccine starts to get disseminated.
So again, why is the market so resilient? A few obvious differences between now and March come to mind: (1) We haven't seen lockdowns yet. Yes, states are restricting dining and gatherings, but nothing on the scale, at least so far, of what happened this spring. (2) We've been here before; this summer we had almost the exact same spike in hospitalizations (see below) without slowing the economy's reopening rebound.
(3), The Fed. If you want to know just how massive their stimulus already has been, read Tuesday's piece. It's why Larry Lindsey, on our show way back in July, said the S&P would hit 4000 next year--well before the deluge of strategists this month have come to the same conclusion. (4) The "excess savings" from the CARES Act are still padding consumer balance sheets on net, which is one reason retail analysts are relatively positive about the holiday shopping season.
And (5), the vaccine is coming. Or perhaps multiple vaccines; Moderna last night said that ironically, the spike in cases has helped it reach enough data in its own vaccine trial to begin analysis, meaning we'll hopefully get results soon.
So that's how you get a market that keeps rallying in the face of worsening Covid news. There has been a reversal in the leadership, however; after value outperformed growth by the most on record in the days around the election, now growth is back in the leadership as the tech-heavy "stay-at-home" trades resurge. And even the most bullish strategists like Michael Darda think we're starting to enter the range of fair value already for the S&P.
It's going to be a tricky few months as it is for the market; and, like I said a few Mondays ago, if shutdowns return, all bets are off.
See you at 1 p.m!
Kelly
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