What’s next after elections
Post-elections, Covid-19 cases continue to spike in the U.S. Biden has formed a task force to bring the pandemic under control. But plans can only be executed after he officially takes office in late January next year. Meanwhile, Trump may be more focused on disputing election results than keeping the pandemic under control. With few measures in place till then, there could be a further escalation of cases.
Where are we headed? The weekly percentage increase in new cases continues to trend higher with no signs of plateauing (Figure 1). This indicates that virus spreads are escalating. The current autumn season and coming winter season could provide an environment for increased contagion as people are confined indoors by the colder weather and shorter daylight. Hospitalisation and ICU patients have also trended up with the third wave and are on pace to exceed the severity of the first two waves (Figure 2).
Will the U.S. lock down like Europe? We believe a nation-wide lockdown in the U.S. is unlikely. Near term, Trump is still in control, and he is definitely in no mood for a lockdown. When Biden does take over, he aims to empower the CDC to guide states on restrictions, depending on the ‘degree of viral spread’. He favours state-based restrictions to minimise the economic pain for businesses. Biden also leans towards Dr. Fauci for advice and Dr. Fauci favours public-health measures, not national lockdowns.
In the worst case, there could be restrictions or selected lockdowns in several high-risk states. There are currently 12 at high risk. In the event of rampant state lockdowns, fiscal stimulus is crucial to mitigate the economic impact. Without it, the economic recovery may drag out and stocks may fall back closer to 3,200 for the S&P 500.
Glimmer of hope. As of now, optimism on Pfizer/BioNTech vaccine has overshadowed the resurgence. Investors are optimistic as this vaccine:
Investors have to dig in for longer term. We believe that the positive impact from vaccines may not materialise until around end-Q1 or early Q2 next year. Our rationale is:
Investors would do well to adopt a balanced investment strategy, in our view. They may diversify some capital to value stocks while maintaining exposure to growth stocks such as technology. Why value stocks? Any positive vaccine news subsequently may highlight a quicker-than-expected resolution to Covid-19 and reinforce further shift towards value. Value and growth stocks have made an uneven recovery from Covid-19 since end-March. Their huge divergence may allow value stocks to catch up in price performance when things ‘normalise’ (Figure 4).
That said, investors have to be in for the longer term. The mass distribution of vaccines will take time and their positive impact may not be felt until around end-Q1 or early Q2. Until then, virus resurgences and tech stocks’ resilience during this pandemic can continue to gain traction.
Longer term, the trade-off between value and growth may not be justified, as both are still positively correlated. Based on the S&P 500 Value and Growth Index, their 5-year and 3-year correlations are 0.8 and 0.4 respectively.