Market attention shifts from elections to vaccines. Do value stocks benefit?

More than a week past Election Day in the U.S., it seems clear that financial markets have turned their attention primarily to issues other than politics. While the results of the presidential election will not be officially final for a few weeks, the financial markets seem confident that Democratic candidate Joe Biden will become the next president of the United States on Jan. 20. 

Markets expecting Republican control of Senate, but outcome unknown until January

The market also seems to be behaving consistent with the belief that the Republican Party will maintain control over the U.S. Senate, and that the Democratic Party will control the House of Representatives. It is important to note that we will not know the final answer to this until the results of the two run–off elections in January for the Senate seats from Georgia are decided.

Currently, Republicans have won 50 seats. Importantly, this also means that the Democrats would need to win both seats in Georgia in order to wrest control away from the Republicans (with Vice President-elect Kamala Harris serving as the tiebreaker for the Democrats).

While both Republican candidates in Georgia won a plurality of votes in very crowded ballots, they did not win a 50% majority, which was what was needed in order to avoid runoff elections in January. That said, we believe that the odds of the Democrats picking up both Senate seats appear unlikely for many reasons. The market appears to agree, and is expecting the Republicans to have either 51 or 52 seats when the new Congress goes into session in January. Notably, in either case, that is a razor–thin majority.

Market focus shifting to COVID-19 vaccine developments

As mentioned earlier, the market seems to have turned its attention to other matters that are much more likely to drive market and economic results over the next 12 months. The biggest risk factor with regard to this has been, and continues to be, the coronavirus pandemic.  

On Nov. 9, drugmakers Pfizer and BioNTech announced that their vaccine candidate for the coronavirus was found to be more than 90% effective in preventing COVID-19 infections. As we understand it from medical experts, this is a spectacular result that should give the world hope that life could return to normal perhaps as early as the middle of next year.

The market clearly had this same positive reaction, and we saw this in the numbers. For starters, the headline performance in equity markets was strong, with the Russell 1000® Index rising nearly 1%1 on Monday. Even more interesting in the wake of the news were the market observations under the hood, which we’ll take a look at now.

Value stocks soar in wake of vaccine news. Is this a sign of what’s to come?

We have been saying for quite some time that a vaccine may very well be a catalyst to strong market performance in general, while also asserting that it could trigger a rally in value and small-cap stocks, which have lagged in performance for much of the past decade, including this year. Monday’s encouraging news offers some clues as to how such a rally may unfold, as it led to some interesting leadership changes in the U.S. market.

Notably, while the S&P 500® Index was up a modest 1.2% that day, the Russell 1000® Value Index soared by 4.1% and the Russell 2000® Index climbed 3.7%. What’s more, the index that captures the intersection of small value stocks—the Russell 2000® Value Index—shot up by a staggering 6.87% on Monday alone. In contrast, the Russell 1000® Growth Index fell by 3.2%.

This is what we refer to as the opening trade, and it fits a pattern that we have seen consistently since May. On days where the news indicates it may become more likely that the economy will more fully open, value and small cap stocks have outperformed. 

We do believe that Monday’s equity-market performance is a harbinger of what is to come—although we still think there will be plenty of additional volatility, given that COVID-19 is now raging across the U.S. and Europe at record rates. Ultimately, we believe that this tug-of-war between positive news surrounding vaccine developments and therapeutics and negative news pertaining to the surge in infections is very likely to be the factor that drives returns over the next several months.

1All stock returns are in U.S. dollar terms.