Analysis

The market may have overreacted to news about a coronavirus vaccine…

November 16, 2020

The news about a possible coronavirus vaccine pushed the stock market higher last week. It caused a rotation out of some of the pandemic’s winners.

Today, we will discuss how investors should think about a possible end to the pandemic and if trends from the past several months are truly coming to a close.

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Last Monday morning, Pfizer (PFE) announced it had received positive results from its vaccine trial. Its vaccine candidate was determined to be more than 90% effective, well above what the FDA was seeking and investors were expecting.

This led to significant excitement from investors. The broad market opened higher, approaching up 5% early in the day. And yet, not all stocks saw the same level of appreciation.

The stocks hit hardest by the pandemic were up the most. Companies like Hilton (HLT) and American Airlines (AAL) ended the day up over 10%. Royal Caribbean (RCL) was up over 25% and AMC Entertainment (AMC) rose more than 50%!

However, many of the “At-Home Revolution” names we have been talking about for months had awful days. Companies like Zoom (ZM), Peloton (PTON), and Netflix (NFLX) were all down significantly on the day.

The pandemic and people staying inside aided all those companies. With an end to the pandemic now in sight, investors are wondering if time is running out for these firms and the outsized profits and growth they’ve seen.

We here at Valens think investors may have been getting ahead of themselves.

The first reason is a classic issue investors have with this type of news. We call it the “history book” issue.

For example, it may only take one chapter in a history book to read about the entire Great Depression.

Even if you read an entire book about the Great Depression, the time it takes you to read that book might be less than a week, or even a day. The time it takes you to get from 1929 to 1933 might be a few hours or chapters at maximum.

However, the Great Depression was over a decade long. Living it and experiencing the ups and downs was a much different experience when you didn’t know what was actually coming next. Readers likely know, or will soon find out, making the pain of the moment and the reactions to news more muted. Context is a powerful tool.

Similarly, we do not know everything about the coronavirus vaccine yet. We know the Pfizer trial had a high efficacy level. However, we don’t know when the vaccine will be available or if the data will change in coming weeks or months. There will be a lot more time between this news and real developments than people are extrapolating, considering the market moves on this news.

Additionally, coronavirus is not going away anytime soon. Cases continue to reach highs in the U.S. and around the world.

When a vaccine is finally approved, it will still take at least a year to produce and distribute enough to treat the entire country. There is also a question of whether people will take a vaccine and how long immunity it will last.

Because of all these questions and overhangs, the market has likely been too excited, and many of the trends the pandemic has unlocked are here to stay.

Since the recovery is going to take longer than investors may be hoping, companies in industries that have been punished are likely to continue to suffer for some time. This means it is not time to have a “race to trash” and buy beat up companies with high credit risk in the hope they’ll survive.

Instead, investors should still be choosy with these companies. Businesses will still need to Survive to Thrive in the coming months. There are firms in travel and other industries that have been hit hard and might still go under, so find the companies that can survive and will thrive instead.

Also, the At-Home Revolution is far from over. While working at home may not be as widespread as it is currently, the practice is not going anywhere. As a personal example, we will shift to a hybrid model after the pandemic.

Similarly, investments people have made in their homes and in experiences, like new boats, ATVs, and new additions are likely to lead to structural changes in how people spend their time.

The sunk cost fallacy is a real thing. People get anchored on how much they’ve already spent on something, and that leads them to spend more on it, even if it might make sense to spend money elsewhere.

When experiencing an event as big as a pandemic, the changes and effects are going to last for years. We have seen this happen with other large-scale events throughout history.

The creation of Levittowns in the 1940s started the suburban revolution. The initial Levittown was not the important event, but it was a catalyst for the millions of Americans who flocked to towns just like it after World War II.

When cholera was a major issue, it pushed immigrants out of buildings in downtown Manhattan to Brooklyn and Queens. All those people didn’t flock back to Manhattan after they moved out. The immigrant communities instead developed in places like Sheepshead Bay in Brooklyn and Flushing in Queens.

Disposable razors from Gillette in World War 1 trenches wasn’t just a short-term solution to keeping clean. When soldiers returned home, the ongoing use of disposable razors led barber shops across the country and world losing significant business as men could shave their face on their own.

All these events might have been perceived as short-term trends at the time–the lasting effects are what changed society.

The At-Home Revolution and changes in spending that have occurred are likely to persist. This means strong cash flows for longer than people and the market may fully comprehend.

The positive vaccine news is exciting, and we are cheering for an end to the pandemic and for business to return to normal. But investors who let their hearts and hopes guide their investments are investors who end up losing money.

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research