Medical workers carry cold storage boxes containing injection material during a Phase 3 trial of the Johnson & Johnson Covid-19 vaccine.
Angel Garcia/Bloomberg
The stock market hasn’t been this spooked since Halloween.
The Dow Jones Industrial Average slipped 283.71 points, or 0.9%, this past week, to 30,814.26, while the Nasdaq Composite dropped 1.5%, to 12,998.50. The S&P 500 fell 1.5%, to 3768.25, its largest decline since the week ended Oct. 30, though back then it dropped 5.6%. Still, it was the S&P 500’s first weekly drop of more than 1% since then, a sign that investors, unflappable until now, really were taken aback by what they saw.
And it wasn’t all that different from what was worrying the market back in October, even if the extent of the worry was much smaller. That was the week before the election, and investors were on edge. The path of Covid-19 and its impact on the U.S. economy—and on economic data like October’s nonfarm payrolls—was also a concern. The first read on coronavirus vaccines was also imminent, and expectations were low.
Everything turned out fine. The presidential election turned out to be a political event, not a market one, payrolls surprised to the upside, and then, on Nov. 9, Pfizer (ticker: PFE) announced that early data showed its vaccine had an efficacy rate of greater than 90%. The stock market hasn’t dropped more than 1% since then.
Until now. This past week—with the market looking ahead to the inauguration and what might be in store following the Capitol riots and Donald Trump’s second impeachment—was a terrible one for economic data. Whether it was small-business confidence, consumer inflation, or just about anything else, the numbers painted a picture of an economy that was slowing more rapidly than expected. Initial jobless claims, which spiked to their highest level since August, and retail sales, which fell 0.7%, were particularly frightening.
Of course, there were good reasons for all this. Covid cases have been surging—global deaths have now topped two million—and much of the economic damage is due to the renewed lockdowns across the country. But there’s another factor, says Jefferies economist Aneta Markowska: fiscal drag. The first Covid relief package was followed by a surge in retail sales, which slowed as the money and benefits ran out. They could rebound by more than 10% month over month thanks to the new $600 checks and unemployment benefits, and will likely jump again if even a part of Joe Biden’s $1.9 trillion fiscal relief package gets passed.
And that doesn’t even take into account the fact that the battle against the virus, now focused on the difficulty of distributing the vaccine, should take a turn for the better as more people start to receive the Moderna (MRNA) and Pfizer- BioNTech (BNTX) inoculations, and Johnson & Johnson (JNJ) prepares to release late-stage trial data on its own vaccine around the end of January.
The Johnson & Johnson vaccine, in particular, has the potential to be a game-changer, says Evercore ISI strategist Dennis DeBusschere. Unlike the Moderna and Pfizer offerings, Johnson & Johnson’s only requires one shot. If the data is good—and early trial results suggest it will be—sentiment could shift suddenly for the better. Investors will be closely watching the vaccine’s efficacy rate, which is now expected to be somewhere around 80%. A higher number, and the market could take off, just like it did back in November. But even a lower number should be good for the market—and all of us—if the vaccine shows it can reduce the severity of the disease, DeBusschere says.
What’s more, it will have big implications for some of the most popular speculative trades—the no-earnings, high-valuation companies that lately have been lighting up the market. If reopening happens the way DeBusschere envisions, bond yields could play catch-up with inflation expectations, perhaps rising as high as 1.6% or so, making real yields less negative. That would signal the end of the speculative trade. “That’s where the math for speculative tech gets nasty,” DeBusschere says.
If you doubt that trading has moved away from high-growth tech to economically sensitive stocks, just look at what the FAANGs plus Microsoft (MSFT) have done since the end of August. The stocks of Facebook (FB), Apple (AAPL), Amazon.com (AMZN), Netflix (NFLX), Google parent Alphabet (GOOGL), and Microsoft have dropped an average of 5%, even as the S&P 500 has gained 8%. Just one, Alphabet, is up since then, and by just 6.6%.
Big Tech’s market dominance appears to be diminishing. Small tech’s day of reckoning is still to come.
Write to Ben Levisohn at [email protected]
