Stock markets shot up this morning, with the Dow up 6%, the Russell 2000 index of small-cap stocks up 7.5% at one point, and the S&P 500 up 4.5%.
Pretty much every sector was along for the ride. Utilities, real estate, pot stocks, and energy all rose as sectors that have lagged behind are now catching up.
It’s all because of some great news on the Covid-19 vaccine front. American Pfizer Inc. (PFE) and German BioNTech SE (BNTX) just released some preliminary results from their vaccine candidate, showing that it prevented over 90% of Covid-19 infections.
This is truly fantastic news. Never before have we managed to create a vaccine in under a year. It’s not even been close.
And to hit the 90% effectiveness mark on the first try is astounding. Most experts were expecting something between 60%-70% in the first generation of vaccines.
This really shows the ingenuity and skill that’s unleashed when we as a culture stop being tied up with the politics of “who does this benefit,” and instead work together. The researchers, physicians, nurses, and everyone else who worked on this deserve our thanks. In decades to come, we may well look back on this as the moon-landing moment of biotech.
It gets even better, too, because the Pfizer and BioNTech vaccine candidate may now be in the lead, but there are plenty of others right behind it. Moderna Inc. (MRNA) has its own candidate in late-stage trials, and this one uses a similar approach to the Pfizer one. Then there’s the candidate that AstraZeneca plc (AZN) and Oxford University are working on, as well as one from Johnson & Johnson (JNJ).
With more options comes more opportunities for success, especially as all the vaccine candidates but the Johnson & Johnson one rely on two shots. That means they will require twice the production capacity, twice the transportation and logistics, and twice the difficulty of giving people the shots.
Now, this great news may be lifting stock markets in general. But there’s a number of stocks that are falling today, some by a lot.
Web conference company Zoom Video Communications Inc. (ZM), for example, is down almost 17% as I write this.
That’s where this week’s Reality Gap comes in. It’s the stocks that have outperformed since the Covid-19 pandemic began that are being punished today. Zoom, Amazon.com Inc. (AMZN), Netflix Inc. (NFLX), and so on are all down as I’m writing this.
Meanwhile, this year’s losers are soaring. Cruise line stock Carnival Corp. (CCL), for example, is up over 33% on the hope that the Pfizer news means the pandemic is about to end.
The Reality Gap is that neither is quite true. See, the stay-at-home victims that are up today, especially travel and restaurant stocks, won’t rally for long once the reality of the vaccine news sets in.
Pfizer and BioNTech say they will have enough doses to vaccinate at most 25 million people by the end of this year. By the end of next year, they’ll have enough for 650 million people.
That’s just not enough for us all to be able to jump on cruises to the Caribbean again. Even if the first wave only goes to Americans, which it won’t, that will still only cover healthcare workers and others at high risk.
And that’s assuming we get the logistics and distribution right, and that the vaccine gives long-lasting protection. We still won’t know that part for months.
On the other side, many of the stocks getting trashed right now will recover soon. Here, it’s important to separate the work-from-home stocks from the stay-at-home stocks. With millions of people now working from home and largely liking it for the cost savings and greater productivity it allows, there’s no putting the work-from-home genie back in its bottle.
It’s here to stay.
That means demand for Zoom, for cloud services from companies such as Amazon or Microsoft Corp. (MSFT), and for online document management from Docusign Inc. (DOCU), isn’t going away. These work-from-home stocks will recover, so buy them on today’s dip. We did just that in the Dark Edge Project trading room where traders reported snagging 50+% gains in less than an hour on our option plays.
The stay-at-home stocks that have benefitted from people not being able to go outside at all, however, may not recover. This may well be the end of the dizzying outperformance rally that stay-at-home stocks including Netflix and Domino’s Pizza Inc. (DPZ), have seen this year.
A vaccine would allow us to go out more, and so use less of these home entertainment, food delivery, and online retail stocks.
The trade here is to fade both moves. Buy the work-from-home stocks on the dip, and sell the stay-at-home victims, such as travel stocks, on the rip. And just avoid the stay-at-home stocks for a while.
There’s a lot of hope in the markets right now, and hope always feels the best just before a clear path forward exists. Once that happens, the reality of how long this will all take will set in.
Not to mention that election-related market volatility is here to stay. With presumptive president-elect Biden setting up his transition team while President Trump tries a number of legal avenues to secure his re-election, there could be some drama.
Meanwhile, the control of the Senate is still up in the air, as the two deciding seats from Georgia will now be decided in runoff elections in January. Stock markets would probably prefer a Republican Senate to balance out the Democratic “squad” of progressives in the House, now that a Biden presidency is all but assured.
In short, when it comes to election uncertainty and market volatility, “January is the new November,” as one analyst put it
Amid all this, we are still in the middle of earnings season. Pot stocks are up today after the two big names in that space, Canopy Growth Corp. (CGC) and Aurora Cannabis Inc. (ACB) both beat their earnings before markets opened. So expect the cannabis sector’s rocket ride from last week to continue.
Then on Thursday afternoon, three big earnings reports will be coming out.
Walt Disney Co. (DIS) is a bit of an odd one, as its Disney+ streaming service is clearly a stay-at-home business. But the company’s biggest cash cows are the ESPN sports network and the Disney theme parks, both of which depend on a return to something like a pre-Covid-19 normal.
With the stock up 12% today, traders are more interested in ESPN and parks than video streaming. But on Thursday’s earnings, expect another great Disney+ number to send the stock soaring anyway.
At the same time, chip company Applied Materials Inc. (AMAT) will report. The stock has been on a tear for the last week, after Qualcomm Inc.’s (QCOM) strong earnings last week. I expect Applied Materials to show continued strength into the end of the year, following Qualcomm’s lead.
But there is a possibility that today’s divergence between work-from-home and stay-at-home stocks could throw a wrench in the works, as maybe people will be looking to spend less on their home electronics. The company’s forecast is what will decide where its stock goes.
Finally, the plumber of the Internet – Cisco Systems Inc. (CSCO) – also reports on Thursday after markets close. Cisco is a master of good earnings with the exception of August’s numbers, but I expect a return to form on Thursday and a rebound for the stock.
Great trading, stay safe out there, and God bless you,