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Light at the End of the Tunnel

Greater Clarity on the Election Winner and News of a Vaccine Are a Powerful Booster Shot to Markets

Photo by Brian Hoskins
Everyone gets a shot

The first trading day after multiple news outlets named President-Elect Joseph R. Biden Jr. the winner of the 2020 Presidential election, markets seemed to exhale a sigh of relief. When news of vaccine trial results from Pfizer's arrived and were extremely positive (a reported 90% efficacy rate, similar to those typically administered as routine vaccines), the markets went on an absolute tear, sending the prices of risk assets higher, and safe haven assets--especially longer-dated sovereign debt--lower. The reflation trade, which had been unwinding since the prior week, received a fillip as investors began to expect a modest, one-time fiscal expansion to carry the economy along until vaccinations are widely distributed.

Additionally, industries which had seen their fortunes dimmed by the ongoing pandemic suddenly appeared very attractive at their depressed valuations, and credit investors began to take a second look at subpar corporate credits. Emerging markets also bounced as a light appeared at the end of the tunnel. Emerging market currencies rose as credit investors reassessed emerging market credits and found them less wanted and sold developed currencies for currencies to buy emerging market debt. All in all, it was one of those days that everyone who held risk was a great investor.

Not everyone was a winner, though. Technology companies, whose valuations grew on the back of the pandemic and its prospects of continued remote existence or ever greater discount rates, took a step back. Thus small- and mid-cap indexes outperformed the S&P500, dominated as it is by mega-capitalization technology companies. The NASDAQ, a technology index, fell as well as growth became less expensive. goodstead favorite investments Commodities, Infrastructure, Real Estate and Timber all saw price gains in anticipation of strength of economic expansion.

Perhaps nowhere was the change more marked than in global developed market equities, however. Prices in these indexes have been trading in lockstep with the expected fortunes of globalization. COVID-19 has been a globalization-killer: it has encouraged isolationism, fanned nationalism, prevented international trade in goods and labor, and confined people to their countries of citizenship. Multinational corporations were most sensitive to the change in sentiment about globalization, and so as globalism's appeal improved, so did their market valuations.

Surely the enthusiasm for the end of the pandemic has caused assets to rally and risks to be underestimated in the short-term; markets are comprised of the myriad distributed decisions of human beings, and the machines that follow them. They remain only partly rational, are subject to bias. Risk assets and safe haven assets will be repriced over the coming days as markets metabolize the significance of events. One thing that is for certain is that the bettor's markets are likely giving poor odds against the Pfizer team winning the Nobel Prize for Medicine in 2021.

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