Imagine pitching the events of the last seven days to a Hollywood producer as the basis for a major feature film. Picture, if you will, having the audacity to go through with it. There’s a good chance the meeting would have been cut short. The producer would have surreptitiously texted his assistant, and then, amid feigned apologies about an “emergency call with his therapist,” he would have walked out of the meeting and then probably fired off an angry email to whoever let you on his schedule. “How did this amateur get in here? Goldilocks And The Holy Grail? This script is ridiculous.”
A presidential election goes down to the wire amid a weeklong struggle to count the votes, with the challenger narrowly eking out a victory? Church bells pealing around the world? And then, the next business day, the world gets a vaccine that could stop the spread of a deadly virus in a global pandemic? And then, that night, another experimental treatment is approved?
As is typically the case, the truth is stranger than fiction. At the time of this writing, the S&P 500 is up 8.2 percent in six trading days, there is a new administration, and a COVID-19 vaccine is just weeks away from becoming available, at least for highly vulnerable populations. Just last night, another COVID-19 treatment was identified for speedy approval.
November’s market action came in not just like a lion but like some kind of prehistoric super-mammal, maybe a dire lion, if that’s a thing (well, this is the movies, so yes.) Whether the gigantic rally was fueled by relief that there would not be a contested presidential election or by the evaporation of fears of a Blue Wave is perhaps a matter of one’s political persuasion. Nonetheless, the VIX index, a measure of market volatility and a good proxy for “fear,” plummeted from 40 on October 30 to 23 during the Monday session; news of a vaccine was like a Patronus Charm, banishing fear from the market altogether. Shares in airlines soared. Financials leapt. Hospitality stocks posted dramatic gains. The Dementors had been banished.
While the market’s advance faded in the afternoon as “pandemic-proof” stocks lost some lustre, one could not help but believe we were witnessing a bit of history. The election had been impactful. A Biden win but with a GOP-controlled Senate was a hugely positive outcome for the markets—a Goldilocks outcome. While not as overtly pro-business as the previous administration, corporate America is welcoming a Biden administration because of its presumed predictability, if for no other reason. Taxes are likely to go up but not to Obama-era levels, and nobody is going to wind up on the wrong end of a presidential tweetstorm. International trade policy is likely to be a mixed bag, perhaps only incrementally more positive but generally speaking, less dramatic. Again, no tweetstorms blowing up carefully constructed capital budgets and supply chains. Meanwhile, the Senate, which seems fairly likely to remain under GOP control, will provide a powerful check on the Biden administration’s ability to raise taxes and pursue ambitious initiatives such as the Green New Deal. It’s a Goldilocks scenario, just right. Of course, there is a near-term bear case to be made that the divided government scenario will severely limit the scope of a new stimulus package, but…well, maybe that’s a subplot that’s just going to confuse the audience.
“The Holy Grail is a COVID-19 vaccine? Seriously? The next day?” That’s when the Hollywood producer choked on his canapés.
Markets exploded higher after news broke that a vaccine developed by Pfizer and a partner, BioNTech, performed far better than expected at protecting people from the novel coronavirus. The latest trials showed it was more than 90 percent effective—by contrast, the trial’s goals were to hit 60 percent; efficacy rates for the flu vaccine can be as low as 30 percent. This is truly a remarkable result, and is also encouraging for other vaccines in late-stage testing from Moderna, Inc., Johnson & Johnson and AstraZeneca.
Then there is the Eli Lilly therapeutic, announced last night, which will be available almost immediately. The Lilly drug will treat higher-risk patients with earlier-stage COVID-19 who are not hospitalized.
The distribution of vaccines and therapeutics will be a massive logistical labor and perhaps an ethical problem. Even so, one can now reasonably believe that the end to the pandemic is at least in sight, which is extremely fortunate now that the U.S. is reporting more than 100,000 new cases per day as we head into the coldest months of the year.
The accelerating spread of the virus is what brings us back to where we were in the story just days ago, before we arrived at the scene where all the Ewoks were dancing and Yoda, Obi-Wan and Anakin all looked on approvingly. This is why investors had been on the sidelines. The combination of the election and the accelerating spread of the virus had stoked investor fears. To be sure, these were legitimate concerns, and every strategist in the country was writing “the market hates uncertainty.” That may be true on a certain level, but it’s the uncertainty that creates the market. The reason that investors are kicking themselves today for not being fully invested seven days ago is the reason the market went up.
Many of us had the view that we would revisit our exposures after the election—a perfectly reasonable view. The trouble is, when enough people decide that, it doesn’t take long for the juiciest part of the bone to be eaten. And then to get the vaccine news on top of that, well, it just seems impossible to have gotten it all right. That is, unless you had just committed to your long-term strategy all along and did not stray. You would have gotten all of it. Without ever having to do one thing. And that’s the hard part. Not doing a darn thing.
One way to make not doing a darn thing easier is to know what you’re okay with owning at all times. You can do the homework and pick good businesses, or you can stick with diversification. But you’ve got to be in the market in order to be able to participate in the wonderful surprises such as we’ve seen this week. It’s like a ticket to a movie that pays you to sit through the entire show.
Warren Buffett has said many times that he is a lot better at predicting what will happen than he is at predicting when. I’d wager that’s a skill set probably not unique to him.
I reference Buffett fairly frequently in these letters, but please indulge me one more. I happen to share Buffett’s bullishness on America. The American system of industry and wealth creation is simply the greatest in the history of the world. The way we allocate capital to promising ideas, nourish them, and make them available not just to each other but to the entire world, truly does make this country “as a city upon a hill.”
That may not be exactly what John Winthrop had in mind when he wrote those words—he mainly wanted us to behave ourselves—but our political and economic system really is a model for the world. Sustaining this system is worth it, and matters far more than whoever the current occupant of the White House is. America is like a ship that tacks back and forth, right to left, left to right, on sometimes stormy seas, but always with wind in her sails.
It is immediately after you say those words to the Hollywood producer that he abruptly ends the meeting and has security escort you off the lot. And so you step out into the bright sunlight, which is neither too hot nor too cold, but just right, as the credits roll.
That’s when you see the Grail.
Any opinions are those of Burke Koonce and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Burke Koonce is a financial advisor at Raymond James & Associates, Inc., member New York Stock Exchange, member SIPC. www.raymondjames.com/burkekoonce