Vaccine News Sparks Market Rotation

November 13, 2020

Stocks rose for the second consecutive week despite a light week for economic news. Progress towards a Covid-19 vaccine and clarity that the election results are unlikely to change despite the outstanding legal challenges gave bulls a shot in the arm, sending the S&P 500 to a new record high. In vaccine news, Pfizer and German partner BioNTech’s announced their Covid-19 vaccine candidate showed more than 90% efficacy in preventing Covid-19 in trial participants. The early results are encouraging and following additional safety data, Pfizer could apply for FDA emergency use authorization later this month with a roll out of the vaccine shortly thereafter. Bullish sentiment was also driven by Democratic presidential candidate Joe Biden being called as the winner of the U.S. presidential election on Saturday. Relief over the vaccine announcement and election drowned out the week’s other news on jobless claims, inflation, and Eurozone production. For the week, the S&P 500 rose 2.16% to a new record high of 3585.15. 
Jobless Claims Continue to Fall
Jobless claims maintained their downward trajectory, hitting another pandemic-era low. A total of 709,000 claims were filed in the past week, down from 757,000 in the prior week. Continuing claims, which run a week behind the jobless claim numbers, posted an even sharper decline, falling to 6.79 million, a 436,000 decline from the prior week. Job losses have continued to slow over the last several months as businesses have reopened their doors. The jobs market should continue to rebound as vaccines are soon rolled out to the public, encouraging businesses to add to their payrolls.  
Consumer Prices Fall Flat
Following four straight months of gains, U.S. consumer prices stabilized in October, remaining unchanged. Higher prices for dining and groceries were unable to offset declines in apparel and household furnishings. Core prices, which exclude volatile food and energy, were also unchanged. Year-over-year (yoy), consumer prices were up a modest 1.20% while core prices were up 1.60%. Data on producer prices was also released this week which showed prices rising 0.30% in October. While producer prices have increased for six straight months, prices are only up 0.50% from a year ago. Producer prices, which exclude volatile food, energy and trade services, also rose a modest 0.80%. Overall, both consumer and producer prices continue to remain well below the Fed’s 2.00% target rate of inflation. This is bittersweet. On the one hand, it allows the Fed the flexibility to keep rates low, but the persistence of low inflation also stems in part from lower demand, which is obviously a concern for them as well.
Eurozone Industrial Production Slips
The hits keep on coming for the Eurozone as it struggles to contain its second wave of Covid-19. Eurozone production unexpectedly fell in September, driven by a sharp decline in the output of durable consumer goods. Industrial production fell -0.40% month-to-month for a -6.80% yoy decline. That’s below economists’ forecasts for a 0.70% month-on-month gain and -5.80% yoy drop. September’s figures also marked the fourth consecutive month of declining production growth. Like their U.S. counterparts, Eurozone consumers have been buying up consumer goods, but demand appears to be cooling as output of durable goods such as televisions and washing machines fell -5.30% in September. Geographically, the steepest declines were noted in Italy, Ireland and Portugal, down -5.60%, -4.70%, and -3.80%, respectively. With Covid-19 continuing to ravage the region, the drop in industrial production looks set to spill over into Q4.
Back to back weekly gains have helped investors recover from the tumultuous few weeks that preceded the election. Vaccine related news remains the dominant fundamental factor for markets and the positive data from Pfizer this week unleashed a massive transition away from the “stay at home” sectors such as tech, staples and services into the cyclicals, energy and financials. The latter group has woefully underperformed year-to-date but are finally having their moment. The week’s overall return masks a much deeper rotation that is likely to continue in the weeks ahead. We’ve long anticipated this transition, and believe it is justified, but with rising COVID case counts and the Thanksgiving holiday just ahead we also think investors will continue to have opportunities to take advantage of volatility within a broader upward trend.

The Week Ahead

Consumers have been stocking up on goods and houses throughout the pandemic. We’ll see if the momentum continued in October with reports on retail sales, housing, and industrial production.

A Holiday to Celebrate

Yesterday marked the beginning of Diwali, the Festival of Lights that is celebrated by more than a billion people around the world. The name is derived from the Sanskrit word Deepavali, which means “row of lights,” and the holiday is known for the burning of clay Diya lamps that celebrants place outside their homes and in public spaces. Diwali symbolizes how light will always prevail over darkness, and we could all use a celebration of hope right now. 
The five day festival is based on the Hindu calendar and falls between the middle of October and the middle of November. This year, it seems to come at the exact right time. Diwali runs from November 12 to November 16 in 2020. Over the centuries, Diwali has come to be recognized not only by Hindus, but also by Sikhs, Jains, and Buddhists. It’s origin and significance varies according to region and religion. For most Hindus, Diwali marks the return of Rama and Sita, Hindu incarnations of gods, after 14 years of exile. According to the ancient story, Rama and Sita were unjustly banished from their kingdom. Sita was later kidnapped by the demon king Ravana until Rama and an army of animals defeated Ravana and rescued her. Villagers used oil lamps to illuminate the path in the darkness to guide the victorious deities back to their home and to celebrate their return. The festival is also linked to the birth of Lakshmi, the goddess of wealth and prosperity. Among Sikhs, Diwali commemorates the release of the guru Hargobind, one of ten spiritual masters, after 12 years of imprisonment in the 1600s. Jains, whose religion dates back to the first century, observe Diwali as the day that Mahavira, a spiritual leader, reached nirvana. Buddhists celebrate Diwali as the day the Hindu Emperor Ashoka converted to Buddhism in the third century. Despite these differences, a shared belief is that Diwali marks the victory of light over darkness, knowledge over ignorance, and good over evil.
To celebrate the holiday, people clean and decorate their homes, wear new clothes, participate in prayers, create colorful sand art called rangoli, visit loved ones, and cook traditional recipes. The holiday also brings a range of activities geared toward wealth creation. On Diwali night, Hindu households pay homage to the goddess of wealth and light candles and clay lamps, hoping she will visit their homes and bless them with prosperity. Many believe that the more acts of service and giving to others one does during Diwali will bring more good fortune in the year ahead. Diwali also symbolizes a start of new beginnings. It marks the Hindu New Year and the new financial year for many businesses. It is considered a particularly auspicious time to acquire new assets and make new investments. To help celebrants observe Diwali safely amid the pandemic, popular apps like Instagram, Facebook, WhatsApp, Twitter, and Snapchat offer stickers, themes, filters, and emojis to share positive messages with friends and family.  
May we all find peace and comfort from the spirit of the holiday and the belief that, eventually, darkness will be overcome by light. We wish you and your family joy, happiness, and prosperity and a very Happy Diwali.

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