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COVID Recovery Stocks, Election Pave The Path Higher

Multiple headlines about better-than-expected efficacies of what could end up being the first COVID-19 vaccines have swept the markets this month. Each announcement from Pfizer-BioNTech and Moderna has caused a rotation into risk-on sentiment.

· 11/23/2020 19:56

Multiple headlines about better-than-expected efficacies of what could end up being the first COVID-19 vaccines have swept the markets this month. Each announcement from Pfizer-BioNTech and Moderna has caused a rotation into risk-on sentiment. In particular, investors started buying stocks that have been affected by the pandemic under the assumption that we're finally seeing light at the end of the tunnel.

COVID-19 Betas

In a note, Barclays analyst Arik Ben Dor and team describe what they describe as "COVID-19 betas," meaning stocks with significant impacts from the lockdowns and social distancing. Before the pandemic, many of these stocks were historically safer names with lower beta. 

When Pfizer's vaccine news hit the market last week, portfolios with negative COVID-beta exposures saw steep losses. The Barclays analysts said their generic momentum portfolio saw its biggest one-day losses in the last two decades since its "short leg" COVID beta was 62% higher than the "long leg." 

They highlighted some approaches to help investors mitigate portfolio risks caused by news related to COVID-19. For example, they found that in the momentum strategy, neutralizing the COVID beta in the portfolio reduced risk dramatically without sacrificing much performance. 

Risk was further improved by controlling for COVID beta and sector exposures. The Barclays team found that a long/ short portfolio with matching COVID beta and GICS sector exposures while also maximizing and minimizing momentum signals would also have had a smaller loss on the day the vaccine news was announced. They estimate that the Nov. 9 loss would've been reduced 60%, while volatilities since July would have been reduced 75%. 

"Market Nirvana"

JPMorgan analyst Dubravko Lakos-Bujas and team said in their own note that the results of the presidential election will also act as a catalyst for stocks in the near term. They describe a Biden victory with an expected legislative gridlock as a "goldilocks outcome" and "market nirvana" for stocks. The JPMorgan team points out that with power in the legislature balanced, major tax increases and regulatory changes will be difficult to pass. 

Between the presidential election and the expected rotation out of COVID beneficiaries and toward COVID recovery names, JPMorgan expects the S&P 500 to surpass its price target of 3,600 before the end of the year and hit 4,000 by early next year. They see the potential for the index climbing as high as 4,500 by the end of next year.