Call it a relief rally, because investors had a lot to be relieved about on Monday.
Stock-index futures were already on the rise after Democrat Joe Biden was projected the winner of last week’s presidential election over the weekend — all but eliminating one source of uncertainty. Then, Pfizer Inc. and BioNTech early Monday reported what was definitively good news on their COVID-19 vaccine, and a textbook example of a “risk-on” rally was under way.
But analysts warned against reading too much into the election and vaccine news, warning that some big unknowns remain to be resolved.
“It is worth letting the dust settle after today’s big moves. There are risks to every rally,” said Lindsey Bell, chief investment strategist at Ally Invest, in a note.
“And while we believe the vaccine news is a huge positive for the market, there are a lot of unanswered questions. One of those questions is how long it’ll take a vaccine to become available to the masses. We could still be months from the end of the pandemic, and U.S. COVID cases are surging,” she said, in a note.
The Dow Jones Industrial Average DJIA, +2.94% rose more than 1,500 points in early action as it and the S&P 500 SPX, +1.17% soared into record territory, before trimming gains late in the day. The Dow still logged its biggest one-day percentage gain since June.
And some sort of rally did seem justified, analysts said.
In the pipeline
The reaction to the vaccine news “properly overwhelmed the latest efforts to handicap the size and timing of a U.S. stimulus package,” said Christopher Smart, chief global strategist and head of the Barings Investment Institute, in an email.
“Even as rising case numbers have triggered modest news restrictions in the U.S. and Europe, the base case remains that vaccines and improved treatment will bring the pandemic under control enough to allow economic activity to recover during the first half of next year,” he said. “It may or may not be this particular drug, but others are still in the pipeline. ”
But some investors think market participants got ahead of themselves, looking past economic uncertainty that hasn’t been fully dispelled despite election clarity and prospects for an effective vaccine.
“The vaccine result clearly raises hopes that a return to normality is within touching distance, and while that is extremely positive for markets and businesses, we should be mindful that the economic impact of the pandemic is still being felt around the globe,” said Laith Khalaf, analyst at U.K. brokerage A.J. Bell.
“Often the initial knee-jerk response of markets to big events, positive or negative, is an overreaction, which is tempered over time,” he said.
Khalaf said investors should be prepared to “drip feed” money into the market on dips, but shouldn’t be hasty to entirely discard safe-haven assets, which may have become “bloated” holdings in some portfolios, altogether.
Investors pushed up shares of companies that have been among the biggest losers of the pandemic — airlines, cruise-ship operators, movie-theater chains — and dumped the biggest winners, like work-from-home stalwart Zoom Video Communications Inc. ZM, -17.37% and smart-exercise-equipment maker Peloton Interactive Inc. PTON, -20.28%.
Weakness in tech stocks that were primary beneficiaries of the work-from-home phenomenon dragged the Nasdaq Composite COMP, -1.52% to a loss of 1.5% by the closing bell.
Those moves are in keeping with calls over the last few months to add some value or cyclical stocks, which could shine as the economy improves, to portfolios, Bell said. Meanwhile, there might still be a good long-term case for tech, “but it may not outpace the rest of the market like it has since March,” she said.
The long-suffering S&P 500 energy sector surged more than 14% to lead the way higher, with financials the next biggest gainer with an 8.2% rise. The highflying tech and communications-services sectors were toward the rear, falling 0.7% and 0.3%, respectively, while the consumer discretionary sector brought up the rear with a 1.6% decline.
Traditional havens like Treasurys and gold sold off sharply. The U.S. dollar DXY, +0.65%, however, bounced back in volatile trade after initially selling off.
And there’s also the possibility that positive news on the vaccine front, and the accompanying stock-market rally, will cool the drive for another round of heavy pandemic relief spending out of Washington, analysts said. Prospects for another large round of spending were already in question with Democrats appearing unlikely to take control of the Senate.
That could be a problem, according to some analysts, with rising COVID-19 cases in Europe and the U.S. seen threatening the global recovery. Several European countries have put in place tougher restrictions, while the number of new, daily U.S. cases has hit a series of records.
“In the meantime, rapidly rising case and hospitalization levels underscore a growing fundamental risk to equity and other risk asset prices if a fiscal deal is delayed or is underwhelming in magnitude,” said Lauren Goodwin, economist and multiasset portfolio strategist at New York Life Investments, in a note.
For now, however, policy makers might have some breathing room after a stronger-than-expected October jobs report, which were also seen tamping down prospects for a significant spending package. Goodwin said she remains “constructive” on the market, but sees the potential for “near-term speed bumps.”
“What might change this story is the resurgence of COVID infections and, even more importantly, hospitalizations,” Goodwin said. “Both are rising as the weather cools, and already contributing to deterioration in the service sector and in small business employment. A rapid deterioration in health and economic circumstances could prompt further — or faster — fiscal support.”
Barings’s Smart also cautioned that the pace of next year’s recovery still depends on a U.S. fiscal response, “which will be more difficult with divided government and a Republican party finding its bearings in a post-Trump world.
“It may make political sense for both sides to rush the package through in the ‘lame duck’ session of Congress, especially since government funding next to be extended beyond early December,” he said. “But in any case, the size of U.S. fiscal stimulus next year is unlikely to surprise on the high side and that remains a risk. ”