In this week’s market update: shares soar on vaccine hopes; Joe Biden makes it to the White House but faces two years at least of gridlock in Washington; and Brexit enters the last chance saloon as eleventh-hour negotiations get underway.
Some weeks you don’t forget as an investor, and this is likely to be one of them. In normal times a remarkable US Presidential election, which turned market expectations on their head, would be hogging the headlines. These, however, are anything but normal times and Joe Biden is having to share the limelight with a promising new Covid vaccine which has sent shares soaring on a wave of optimism for a landmark medical breakthrough.
So, let’s start with the unexpected news earlier today that Pfizer and Germany’s BioNTech have jointly developed a vaccine against Covid-19 with a remarkable 90% effectiveness. A shot could be available by the year end if the relevant drug authorities give it the green light. The companies are talking about 1.8 billion vaccinations being made available in 2021.
The 90% effectiveness measure is remarkably high for a new vaccine, where anything above 50% is considered good news and 100% never achieved. Pfizer’s shares rose by 15% in pre-market trading in New York and BioNTech jumped 25% on Nasdaq. Given the lead the vaccine looks like having on rivals from the likes of AstraZeneca, those share price gains look modest. This really could be a game-changer.
The impact on the markets more broadly was dramatic too. Stocks most exposed to the impact of continuing lockdowns breathed a massive sigh of relief. British Airways owner IAG rose by a third, while Air France KLM was 30% higher and Ryanair up by 16%. Rolls Royce, which makes many of the engines used by the airlines and which has been in deep financial trouble as a consequence of the pandemic, rose by 46%.
Other sectors on the up included hospitality and leisure, with InterContinental Hotels 14% up on the day and Whitbread, which owns Premier Inns, 18% higher.
The oil price soared too, up 8.5% to nearly $43 a barrel. In London, the FTSE 100 was more than 5% higher. Europe’s Stoxx 600 index jumped 4% and the S&P 500 opened 3% higher. The MSCI World index of global stocks hit a new all-time high.
Corporate bonds were another big winner, as investors decided that companies would find it easier to keep financing their debts and were less likely to default on payments or go bust.
It was not all good news. Shares which have been big beneficiaries of stay-at-home orders, like Zoom, the video-conference service, fell sharply. Food delivery companies like Ocado were hit hard. The relative underperformance of the US market reflects its greater exposure to pandemic beneficiaries. The tech-heavy Nasdaq index only rose by 0.8%, having jumped by 9% last week. In the bond market, the resurgence of risk appetite saw money being pulled out of the safe haven of Treasuries. The yield, which moves in the opposite direction to price, rose by more than 0.1 percentage points to 0.94%, its highest level since June. Gold, another safe haven, fell by 4% to $1,863 an ounce as investors looked to put their money to work in riskier assets.
The sharp gains on global stock markets built on a wave of optimism that had followed the announcement over the weekend that Joe Biden had pulled off a narrow victory in the US Presidential election, ousting Donald Trump after a single four-year term. The closeness of the race was reflected in the four days it took for confirmation of the result as millions of postal votes had to be counted long after the polls had closed on Tuesday.
The victory for the Democrats meant that Trump will be the first president since George Bush senior in 1992 not to be re-elected for a second term, although at the time of writing he has not yet conceded defeat and legal actions continue in a number of states.
The surge in share prices last week - the S&P 500 was 7.3% higher - came despite not because of the election result. It was actually not the decisive result that investors were hoping for in the run-up to last week’s vote. In the final days before the election, shares had risen sharply on hopes for a so-called Blue Wave in which the Democrats won control of both the White House and the Senate. Although confirmation will not come until after a run-off in Georgia in early January, it now looks likely that the Republicans will hold onto a slim majority in the Senate.
That potential grid lock, which makes the chance of a big fiscal stimulus next year in America less likely, should have seen the market rally go into reverse. But such is the importance of technology shares to the overall market that a return to the perceived safety of the FAANGs lifted the market even higher. It was almost as if investors decided that they were going to buy shares whatever the outcome.
The history books suggest that optimism might be the right response. The likely combination of Democrat White House and Republican Senate is quite rare - only six times ever and twice in the past 100 years - but on those two recent occasions the first two years of the presidential term have been excellent for investors.
In the first two years of Bill Clinton’s second term in 1997 and 1998 the market rose by 27%. In the same period in Barack Obama’s second term - 2013 and 2014 - shares rose by 22%.
Shares might have bounced on the election but the reflationary story on the back of a fiscal and monetary policy double header was not the reason. The fiscal promises made by Joe Biden during the campaign look like they will run into the Senate sand at least until mid-term elections in 2022 give the Democrats another shot at creating a united government.
But the reflation narrative got a major boost from this week’s vaccine news because eliminating the fear of Covid-19 significantly accelerates the re-opening of some of the world’s most important economies in Europe and North America.
This is just the boost that stock markets needed to confirm that the already stellar third quarter earnings season so far has the legs to continue into next year. With economies having recovered perhaps two-thirds of the activity they lost during the first lockdowns, the big question mark was always going to be how long it would take for the final recovery to pre-pandemic levels of GDP and company profitability.
That now looks realistically rather sooner than we thought. Which in turn justifies the stock market recovery which naturally preceded the earnings recovery, as it always does, but which was vulnerable to a more disappointing earnings trajectory in the event of further lockdowns over the winter.
Already the expectation that earnings would fall by 21% in the third quarter earnings had been tempered by better than forecast results in recent weeks. By last Friday the projected fall was just 9%. So even before the vaccine news, the outlook was brightening up. The market was pushing on an open door when this week’s announcement hit the wires.
Which brings us to the third big market driver this week. Again, in a normal week this might lay claim to being a very important story. But this week, Brexit seems rather unimportant.
In the context of the last four years European psychodrama, however, this week is quite a big deal. With the clock ticking down towards the year end deadline for Britain to finally leave the EU, after an eleven-month transition period, negotiations are mired in disagreement over fishing rights and state aid.
While these might seem like inconsequential matters compared with the economic damage that would be caused by a no-deal rift between the UK and EU, there is a real possibility that time does run out without a free trade agreement being signed, sealed and ratified by the 28 countries that need to agree the terms.
The cynical view is that, given the massive climb-down that either side would have to make to facilitate a deal, it is more politically expedient to let the deadline pass and blame the other side’s intransigence.
This despite the fact that moving to World Trade Organisation terms might cost the UK 8% of GDP over 15 years. Even if there is a so-called skinny trade deal, the bit might amount to 5% over the same period.
The question for investors is just how significant the Brexit impasse might be given the relative underperformance of the UK stock market not just since the pandemic but for many years now. £100 invested in the FTSE 100 ten years ago was until this week’s dramatic rally worth pretty much the same amount a decade on. The same amount invested in the MSCI World index of global stocks, by contrast, would have doubled.
So, arguably a vaccine led reflationary rally, combined with the UK market’s significantly more attractive valuation, might make the FTSE 100 a big winner from here.