As we write this, the market is in the middle of a face-melting rally. And yes, that's the technical term for it. To recap: in the three weeks before the election, the market lost 7.5%. There were widespread expectations of a "blue wave", and the market didn't like seeing the specter of inflation in all the anticipated government spending given Democratic Executive and Legislative branches.
Since election day, the market's up 11%. In a week. Initially, the market rallied on the much ballyhooed "blue wave" not materializing. If there's continued gridlock in DC, then it falls to the Federal Reserve to try and stimulate the economy. Which means more QE. Since all QE really does is drive up stock prices, the market was happy.
And then this morning, Pfizer comes out with a positive announcement on their Phase 3 trial, and the market rips. Small caps up 8%. Airlines up 16%. Cruise lines up 23%. Movie Theaters up 60%. Retail up 24%. Even Hertz (still bankrupt, by the way) up 25%. Face melting.
The problem here is that nobody really knows anything.
On the election front, we don't have, in this country, an official institution that "calls" elections, so the media proclaiming a victory is, in point of fact, meaningless until the various states clear the various legal challenges, certify results, and the Electoral College meets. That's December 8-14, for those curious.
But let's assume that the current outcome of the election holds. We still won't know the composition of the Senate until January, when Georgia holds not one but two Senate runoff races. If they both go Democrat, then the Senate is 50-50, with the VP being the tie-breaking vote. Not quite what was meant by "blue wave", but there's still a chance Democrats could control the Executive and Legislative branches of government, which is what sent the market down 7.5% before the election in the first place.
As for the Pfizer announcement, it's certainly good news. But forgive us if we'd like to see actual peer-reviewed data instead of a presser. Basically, Pfizer has 43,000 people in the study, and these interim results of 90% efficacy are being announced after 94 total cases of COVID were reported among the 43,000 in the study.
Here's what we don't know: 94 out of 43,000 is 0.22%. Were all 43,000 even exposed to COVID? It makes a pretty big difference if your trial patients are in COVID hotspots versus, say, Taiwan, where there have only been 577 cases on an island of 24 million. Is the 90% efficacy constant across age groups? Does the vaccine reduce the severity of the disease if you do still get it? Does it reduce the infectiousness?
Again, let's take the results at face value and assume a 90% effective vaccine. The expectations are that you could produce enough to vaccinate 25 million people this year and maybe 600 million next year, or a combined 8% of the world's population by 2022. Access to the vaccine may be compounded further by reports that it has to be stored at -60 to -70 degrees Celsius. That's apparently not the easiest thing to accomplish. Meanwhile, the US is accruing new cases at 100k per day, and New Jersey has just forbidden indoor dining. Again. And everything is trading like bankruptcy risk is off the table?
When everything is priced to perfection, anything short of perfection is bad news. So as we turn the calendar and put 2020 behind us, let's celebrate the fact that given everything we've seen this year, markets are up double digits. It might be a good time to book some gains and adjust those risk exposures, because while there are high hopes 2021 will be better than 2020, it almost certainly won't be perfect.
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