The media are falling over themselves to highlight the rising number of COVID-19 cases in the Dakotas. They’re latching on to the words of President-elect Biden that we are in a for a long, “dark winter.” New York is debating whether to keep schools open on a day-to-day basis. Some are even calling for more lockdowns. It seems doom and gloom is selling like never before.
Yet, in the last week, two vaccine candidates have reported spectacular results. It’s likely they’ll be approved for sale by the end of the month. Manufacturers Pfizer and Moderna expect to have a combined 40 million doses ready to go by the end of the year. They’ll have prepared billions of doses by the end of next year. If even half of the remaining vaccine candidates are approved, there will be vaccines for whoever wants them by the end of the second quarter.
Wall Street is forward-looking. That’s why it’s at new all-time highs. Investors are looking past the short-term headlines.
There’s a very real possibility of the global economy bouncing back in a big way in 2021. That’s why the stock markets of countries that came through the pandemic in good shape are breaking out. The markets of Japan, South Korea, Taiwan, and India all made new highs yesterday.
There’s a great deal of pent-up demand in the global economy. Everyone is sick of social distancing. I’m looking forward to burning my family’s masks, when all this is done, and going on vacation. I don’t expect to be alone.
I’ve been using this whole episode to teach my daughters about value opportunities. Cruise brochures have been arriving over the last couple of weeks. Some are offering two-for-one deals on Mediterranean trips next summer and fall. The offers include airfare and a choice of drink packages, shore excursions, or dining packages.
The speculation is that the virus will be a thing of the past before you have to get on the ship. If it is, you get to enjoy a heavily discounted luxury vacation. If not, you risk losing your vacation and having to endure the misery of quarantine in a foreign country. I love those kinds of risks. Now I just have to convince Mrs. Treacy.
Investors are coming to the same conclusions. There are legions of businesses on sale right now. They’ve been on life support since the pandemic kicked off. They’ve written off every possible liability.
In management speak, it’s called kitchen-sinking the earnings call. You load every last bit of bad news into the forecast – throwing the kitchen sink at it – because investors are expecting bad news anyway. The benefit is you get to blame bad news on something that no one could have foreseen. If results surprise on the upside next year, management looks legendary.
A vaccine-enabled recovery is likely to benefit small- and mid-cap companies relative to large-caps. Big companies did best from the pandemic. They’re unlikely to be able to sustain their growth rates when it’s over.
It’s exactly the opposite for mid-caps and small-caps. They took the biggest hit from the economic shutdown. That means they have the most to gain from opening back up. That helps explain why the Russell 2000 small-cap index is at a new all-time high and the Nasdaq-100 is not.
This chart of the Nasdaq advance-decline line tells a similar story. The line subtracts the number of declining shares from the number of rising shares. It has been rangebound since 2009. That suggests the massive outperformance of the Nasdaq has been due to a small number of shares. If the advance-decline line breaks upwards, it would signal a much broader recovery.
This chart also helps put short-term moves into perspective. The number of advancing versus declining shares is in sharply negative territory and has been that way since 1998. If it does start to trend higher, it would be a major vote of confidence in the case for a U.S. economic revival.
All the best,