A Vaccine for Your Portfolio

Last week, biopharmaceutical companies Pfizer and BioNTech announced that their mRNA-based vaccine candidate has demonstrated evidence of efficacy against COVID-19 in participants without prior evidence of infection. The vaccine candidate was found to be more than 90 percent effective in preventing COVID-19 in participants in the first interim efficacy analysis. The study enrolled 43,538 participants, with 42 percent having diverse backgrounds, and no serious safety concerns have been observed. Submission for Emergency Use Authorization to the FDA is expected to occur in the third week of November.

This is much welcomed news that people all around that world have been anxiously waiting on. It is a symbol of light at the end of the tunnel, an omen of hope, and an indicator that perhaps life can get back to normal at some point in the future. While this is great news for the long term, it must bear noting that US cases continue to set daily records, and there continues to be a real health risk as we roll into the winter season.

Markets reacted in a seemingly euphoric manner with the Dow opening on the news more than 1,500 points in the green. This advance eroded throughout the day with the index closing up more than 800 points. What was more interesting to us was the significant rotation out of the beloved “stay at home” technology stocks and into the badly beaten down cyclical names. While this seems to make sense to us logically, we do not feel this indicates a lasting trend, especially for technology. Many of the technology names that have benefited from the accelerated trends due to the virus were performing very well even before the virus came about, supported by strong fundamentals.

We must caution investors in the sense that, while this is great news, it will take a considerable amount of time to produce and distribute a vaccine to enough willing participants to achieve immunity in a large enough population to considerably put a cap on the spread of the virus. We hope to see travel and leisure trends begin to materially improve in the middle of 2021. With that, we would expect to see some improvement in stock prices of some of the hardest hit sectors like real estate, aerospace, and energy.

Accordingly, we remain even more constructive on equities, knowing that a vaccine is likely to be widely distributed in 2021. While it has been a rough year for cyclicals, we see light at the end of the tunnel for some momentum in the new year and we think technology can continue to grow, even as people return to the office and classrooms.  We must stress the importance of knowing and especially understanding your tolerance to market volatility and matching that with your portfolio.

If this year has taught us anything, it’s that things can happen quickly, and markets will move even quicker than we can react to them. Our investment philosophy supports the use of portfolio “guard rails,” such as trend-following quants that take a non-emotional, mathematical approach to the markets. Additionally, the use of strategies that employ hedging to offset some risk have helped to smooth out what has been quite a ride this year.

As always, if you have questions, we’d love to hear from you.

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