First the relief, now for a wee dose of reality. Stock markets are looking a little more cautious after yesterday’s massive surge on news that Pfizer and Biontech have a vaccine that is 90 per cent effective – investors will now show a tad more caution that the kneejerk rally is out of the way. Markets have a habit of overshooting on the way down, and on the way back up. Nevertheless, an effective vaccine changes the game for investors, at the very least in terms of relative valuations and the premium we are willing to pay for growth.
We have a lot more clarity now than a week ago for two big reasons. Joe Biden is all but certain to become the next president of the United States. More importantly, a vaccine is coming. The worst fears - of enduring year after year of masks, of having semi-permanent lockdowns and restrictions on our liberties lasting forever - should not come to pass. All we need now is a Brexit deal this week as the cherry on the cake. What we in Britain and Europe need more than anything is a confidence injection – and a working vaccine does that. A comprehensive FTA with the EU would help, too.
The FTSE 100 rose over 4.6 per cent, settling just under 6,200. The DAX rose almost 5 per cent and the CAC in Paris was up almost 8 per cent. US stocks opened considerably higher as they took the cue from Europe, but closed less in the green. The Dow rallied 800 points but that was about half the gains at the high of the day, which was a new intra-day peak. The S&P 500 finished up over 1 per cent but also at the lows of the day. In a clear signal of a major rotation from growth to value, the Nasdaq 100 fell over 2 per cent, while the Russell 2000 climbed over 4 per cent. This is a trade that seems to have legs. Due to the makeup of indices and heavy reliance on the big tech names (5 big tech names make up about a quarter of the S&P 500), rotation of this nature may act as a headwind and means it’s not a straight line up. It will be messy as portfolios rebalance and we can expect more outsize moves in some of the most exposed stocks to the vaccine. But, overall, the landscape for equity markets is favourable.