Investors showed confidence in the market last week as certain stocks hit all-time highs. This bull market comes on the back of positive news in the race to find a vaccine for Covid-19, which has been responsible for putting many countries into output crushing lockdowns. Investors are betting that the vaccine developed by Pfizer in collaboration with Germany’s BioNtech could be the key to ending the pandemic.
Investor confidence was also given a boost when it became clear that Democrat Joe Biden would become the next US President. Investors see this as a return to predictable policy-making especially in combination with a Republican controlled Senate. A Republican Senate would make it very difficult for any radical regulatory or tax changes to be enacted, giving investors more confidence.
The apparent turning point in the fight against the Covid-19 and the election of Joe Biden have given investors the chance to look beyond the current crisis. So-called “stay-at-home” stocks such as Zoom and Netflix fell sharply while the stocks hit the hardest by lockdowns such as British Airways rose 16% on Monday. Last week saw the largest capital inflow into equity markets in past twenty years according to The Financial Times. $44.5 billion worth of US stocks were bought in the first half of the week. This growth came mostly from large institutional investors such as pension funds. Smaller retail investors accounted for just $3.3 billion of inflows. Extremely low interest rates and the promise of more fiscal stimulus will have also played a part in the rally.
Yield Curve Growth
The yield curve on U.S Treasury Bonds – the difference in interest rates between long-term and short-term bonds – which can be an accurate measure of the likelihood of a future recession grew from 0.57% to 0.77% signifying growing investor confidence. The steeping yield curve will help banks who borrow for the short term and lend for the long term.
The Winners and Losers
The stock price rally was the most visible in what are known as value-stocks. The performance of these stocks is more linked with the overall performance of the economy as opposed to individual companies. This has meant that tech stocks did not see the same rise with the tech heavy NASDAQ index actually falling a percentage point. This bucks the trend seen over the decade as value stocks have been unable to produce the same yields as growth stocks.
There are still many reasons for investors to remain cautious. Attention will inevitably turn to the complex roll out of any new vaccines. It appears for the short term that European countries will have variations of lockdowns that have suppressed economic activity in order to suppress the virus. Germany’s health minister confirmed on Saturday that “severe restrictions” would be in place for the next 4-5 months. The U.S has seen its largest daily case figure of 155,000. The incumbent President Donald Trump has vowed that there would be no lockdown, however the incoming President may be more cautious.