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An Unexpected Shot in the Arm for the Election Rally

This week, we were greeted by news of Pfizer’s development of a COVID vaccine with a purported 90% efficacy rate. We always knew there’d be a Vaccine Rally in our future, we just didn’t know when. Most investors were expecting sometime in early 2021. This result came as a pleasant surprise and launched Monday’s rally of epic proportion that took the major averages to new bull market record highs. It had the effect of an afterburner kicking in to boost an already impressive post-election stock market advance.

Looking to the internals of the market, we saw an acceleration of the rotation from the Stay-At-Home stocks to those Cyclical names likely to flourish in a controlled-COVID environment. That produced a “melt-up” of the more reasonably priced value/income issues that had lagged the market-leading Mega-caps since March. In addition, we saw many of the most severely damaged stocks in the Energy, Hospitality, and Travel sectors post some impressive advances. Is this a fully engaged trend that will persist or just a relief rally offering a brief glimpse of what next year might look like with a widely distributed vaccine?

Briefly lost in the euphoria of Monday’s rally was the uncertainty lingering over the election results. However, it appears to us that control of the Senate will remain in doubt until the dual runoff votes in Georgia are certified in January. Add to that the virus surge and a stalemate over a second stimulus package and you have some stiff headwinds that could weigh on investors’ enthusiasm in the short term.

The Vaccine Rally was tempered slightly going into the weekend on news of the renewed impasse over the scope of stimulus being proposed. The Senate favors a smaller package with a targeted approach to address the needs of those businesses and their employees most damaged at this stage of the pandemic. The House is pressing for a larger, all encompassing package that opponents describe as an unwarranted bailout of mismanaged states. It seems as if the rhetoric of old among Congressional leaders has undermined any hope for “unity” and compromise espoused by the presumptive president-elect.

As investors, we’re currently left with “likelihoods” rather than certainty. A close election is behind us but not yet certified. Some COVID restrictions could be restarted due to a seasonal surge of the virus. A vaccine has been developed but the timing and plans for distribution are not yet defined. The need for stimulus is not subject to debate, but who should receive it is. We’ll enjoy this rally for now, but expect these risks to create an opportunity to deploy cash reserves in the weeks ahead. Stay tuned.

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