Cyclical stocks rise as Pfizer’s Covid-19 vaccine hogs the headlines. As the S&P 500 posted a small loss and the Nasdaq closed lower, cyclical stocks are among the top gainers in the market. The Dow Jones Industrial Average went up 262.95 points, or 0.9%, to 29,420.92. Meanwhile, the S&P 500 dropped 4.97 points, or 0.14%, to 3,545.53. Tech-heavy Nasdaq Composite fell 159.93 points, or 1.37%, to 11,553.86.
The blue-chip Dow and its industrial shares rose as crude oil prices went higher. The Dow outperformed tech-heavy Nasdaq by 6.74 percentage points this week. It is the largest two-day performance spread since March 2001. Its close of 29,420.92 on Tuesday is its third-highest close in history. Among its biggest gainers were 3M, Chevron, and Boeing.
Covid-19 Vaccine News Led to Tech Sell Offs
Pfizer announced last Monday that its Covid-19 vaccine showed a 90% success rate. The vaccine, developed with German firm BioNTech, plans to apply for emergency authorization. This can happen later this month once they complete safety data collection.
Investors took this as a sign that a return to normal is nearing. They engaged in profit-taking from tech stocks. These companies profited the most from the pandemic. They increased their net worth by leaps and bounds. The sell-offs pushed Nasdaq, which is tech-heavy, into negative territory.
Cyclical Stocks Rise Beyond the Virus Horizon
Tim Ghriskey, the chief investment strategist at Inverness Counsel, says the cycle has begun. “Equity markets in the U.S. have experienced the start of a significant rotation following the vaccine announcement. It’s been a dramatic change and it’s all in anticipation of returning to some form of economic normalcy once the vaccine has been distributed to the broad population.”
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“The caveat is there’s a second wave to the virus that’s infecting a record number of people,” Ghriskey added. “But at least for now, the markets are willing to look through that economic pain to better days ahead once the virus has been eradicated.”
Oil Surges Ahead, While the Dollar and Gold Ticks Up
On Monday, oil prices extended its surge. Crude recorded its biggest daily percentage gain in five months. The potential solution to the coronavirus proved to be too irresistible to investors. Oil prices gained despite lower demand. Some countries imposed new lockdowns to contain the virus, causing the drop-off. U.S. crude rose 2.66% to settle at $41.36 per barrel, while Brent settled at $43.61 per barrel, up 2.85% on the day.
The dollar held firm as the forex markets absorbed Monday’s vaccine-fueled moves. The dollar index rose 0.08% while the euro fell 0.05% to $1.1807. Gold regained some ground lost, rising 0.6% to $1,873.53 an ounce.
Too Early to Shift
Experts warn that the cyclical stocks rise might be too early. Nick Brooks, head of economic and investment research at Intermediate Capital Group says there’s a lot to do. “The pandemic still has a ways to go, unfortunately,” he said. “Pfizer development is a great development, but I don’t think it’s the game-changer that markets seem to perceive.”
Let’s assume the vaccine gets emergency use approval by November. Production and delivery of the doses, plus actual vaccinations will still take time. Even more important, there is the question of how long the immunity lasts. “It’s far too early for investors to be making a structural shift from growth to value,” Brooks added. “There’s been pretty substantial damage to economies and that’s going to take some time to repair.” He warned that markets might remain volatile for the time being.
What Happens to Stimulus Then?
Investors remain on the lookout for updates to the long-awaited stimulus package. While aid remains a priority, Congress might not see the need for a bigger budget. The positive vaccine development plus an improving economy means less to worry about.
Esty Dwek, head of global market strategy at Natixis Investment Managers, thinks the urgency already passed. “These more promising vaccine developments are an argument for Republicans to delay or to have a smaller-scale stimulus,” she said. “We will definitely get something, even if it’s smaller deals like airlines and more targeted measures.”
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Given the developments, are you switching to value (cyclical) stocks over growth stocks now? Do you think tech stock investors will now start to sell off as the danger of coronavirus wanes? Let us know what you think by sharing your thoughts in the comment section below.