Perkins* Portfolio Manager Ted Thome discusses recent positive developments that may spur a broader economic recovery and a rotation into more value-oriented market segments.

*Perkins Investment Management is a subsidiary of Janus Henderson.

  Key Takeaways

• Investors face conflicting messages as markets reach all-time highs while the COVID-19 pandemic surges.
• However, some recent positive developments – such as the US election outcome and promising news on the COVID-19 vaccine front – have led to decreased uncertainty.
• This may ultimately spur a broader economic recovery and a rotation into value.

 

Coronavirus cases and hospitalizations across the U.S. have risen to their highest levels since the pandemic began, yet markets have simultaneously reached all-time highs. In an already volatile year, these seemingly conflicting signals have given investors a lot to digest over the last couple of weeks. Ultimately, we believe recent positive developments driving markets higher, despite the pandemic spike, may help to support a broader economic recovery and a rotation into more value-oriented parts of the market.

Recent developments help ease uncertainty

Several uncertainties weighing on markets have waned in recent weeks, most importantly those related to the U.S. election and the path of the COVID-19 pandemic. Although the election results are not completely finalized (at the time of writing), it appears likely that there will be a divided government in the U.S. come January, pending the results of Georgia’s U.S. Senate seat re-runs. Markets generally favor this situation, as gridlock typically ensures that no major or extreme policy changes will be enacted that could result in increased volatility.

Leading up to the election, there had been increased uncertainty around tax policy and regulation in sectors like health care, technology and energy. It seems now that the more extreme policy proposals on these issues will not come to pass, which we think could be supportive for these sectors going forward. We are also of the belief that the new presidential administration could foster a more predictable foreign policy and improve trade relations, which would be a positive change in general and for multinational companies in particular.

Pharmaceutical companies Pfizer and Moderna have reported encouraging preliminary results from large-scale trials showing their coronavirus vaccines to be greater than 90% and 94% effective, respectively, significantly surpassing the 50% threshold required by the Food and Drug Administration in its approval process. Competitors AstraZeneca, Johnson & Johnson, Sanofi and Merck are not far behind in the race to provide an effective and widely distributed vaccine. We believe the herd immunity that a vaccine would provide is a vital driver for the market as it would allow economies to reopen. Of course, widespread availability of a vaccine will be the key to getting back to normal, and we expect this to happen sometime in the second half of 2021.

The government and U.S. Federal Reserve have been tremendously supportive thus far in the U.S. economic recovery, and more fiscal stimulus may be on the way. While negotiations on a new stimulus package have been contentious and were postponed by the election, both political parties agree that an additional round of funding is needed. We believe another round of stimulus would be well received by the markets and would help bridge the period between now and the second half of 2021, when vaccines will hopefully be widely implemented.

Support for a broader economic recovery

More certainty in Washington, increased confidence in a forthcoming vaccine and the potential for additional fiscal relief could all help drive a broader economic recovery. With the recovery, we will likely see an uptick in growth and inflation expectations, potentially encouraging a rotation from narrow high-valuation growth and safe-haven leadership into some of the more cyclical and value-oriented parts of the market. Indeed, we have already seen a preview of this with recent stock moves. Broader participation across sectors and companies will be a healthy development for the economy and, accordingly, we think investors may benefit by increasing exposure to more cyclical and value-oriented market segments.