- Recovery and reopening stocks rose sharply on Monday after Pfizer and BioNTech announced that their COVID-19 vaccine is more than 90% effective.
- Dennis DeBusschere, a senior managing director at Evercore ISI, said the combination of positive vaccine news, lower political uncertainty, and lower volatility was clearing a path to a lower equity-risk premium and a higher market.
- In a Tuesday webinar, an Evercore healthcare analyst broke down the challenges to the distribution and administration of vaccines.
- With "plenty of room to run" in reopening names, the team also shared 16 recovery stocks that are rated outperform by Evercore analysts and whose returns have dipped into negative territory this year as a result of COVID-19.
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Monday's announcement from Pfizer and BioNTech that their COVID-19 vaccine is over 90% effective sent shock waves across the financial markets.
While still an early promise to return to normal economic activity, global stocks nevertheless staged a fierce comeback, with investors switching out of coronavirus beneficiaries and into recovery stocks in record time.
Dennis DeBusschere, the head of Evercore ISI's portfolio-strategy research team, took note of the rapid rotation trading.
"On a one-day basis, yesterday was the biggest single-day spread between momentum and value factor performance in the 28-year history of our data," he said on a Tuesday morning webinar.
The combination of positive vaccine news, lower political uncertainty, and lower volatility are clearing a path to a lower equity-risk premium and a higher market, but investors still need to be cognizant of the headwinds that could emerge, according to DeBusschere.
"We do have some hurdles on a go-forward basis ... how damaging the current COVID surge is to activity is something we just have to be a little bit conscious of," he said. "How policymakers — both fiscal and monetary — respond to an economy that is slowing now but where we have a path forward towards becoming more positive creates a very interesting dynamic."
Bridging the gap between markets and reality
Umer Raffat, a healthcare analyst at Evercore, called the efficacy of the Pfizer vaccine "near best-case outcomes."
"Do we know if that efficacy is durable? Technically, we don't know," he said in the webinar. "But in practice, I think this amount of durability will last at least a year."
Another hurdle toward a complete normalization of economic activities is safety data, which has been positive from the 45,000 people dosed so far.
"If you look at what the government is trying to do in terms of implementation, it seems like healthcare practitioners will be first up for vaccine administration, followed by older adults," Raffat said. "But some of the doctors are basically saying we need a little bit more safety data, which is understandable."
What also concerns investors is the timeline of normalization, which could come as soon as summer or slower based on the Center for Disease Control and Prevention's vaccination-administration estimations.
"In recent meetings done by CDC, they've mentioned a number in the proximity of 10 million people vaccinated per month, which is a lot of people," he said. "But 10 million per month means it's going to take several months to start to get to levels where you've vaccinated a good amount of the US. ... Presumably, they can ramp it up to 20 million per month at some point."
Tech for the long-term
Another market implication of the vaccine news is reflected in the sharp increase in 10-year Treasury yields, which have led to investor concerns over whether the markets can go up further.
"Ten-year Treasury yields based on the COVID news went up to about 96 basis points, a little bit higher and getting close to 1% today," DeBusschere said.
Normally, when 10-year Treasury rates go up, highly valued stocks tend to come under pressure, but DeBusschere said that many people have misinterpreted the bond market.
"Real rates are still, on an implied basis, deeply negative, and will be so up until 2% and even beyond then depending on what happens with inflation expectation," he said. "And that's really supportive of equities."
Once valuation spreads fully reflect economic growth prospects, the technology sector will likely outperform again.
"Don't worry about higher rates. They're happening and going higher for the right reason. That's good for tech longer term," he said. "Maybe today's not the day to own tech, but once these multiple spreads normalize, own tech again."
Plenty of room to run for the reopening trade
Though DeBusschere expects the tech sector to outperform in the longer term, he acknowledged that there was still plenty of room to run on the real-estate investment trusts that benefit from vaccines and the reopening stocks.
In a Monday research note, he shared the 16 stocks in the firm's Recovery Portfolio that are rated "outperform" by their respective analysts and have a negative year-to-date price return as of November 9.
The stocks, along with their tickers, industries, market capitalizations, and year-to-date price returns, are listed below.
