On 9 November 2020, Pfizer* announced that phase 3 trials of a vaccine candidate, developed with German biotech firm BioNTech*, had been more than 90% effective in preventing COVID-19.1 This positive news has proven to be a significant turning point in investor sentiment. Since that announcement, both equity market performance and investor flows have pointed to a more constructive outlook on a global economic recovery in 2021. While this is positive for the long-term outlook, shorter-term uncertainties may continue to contribute to volatility into year end. For this reason, investors should consider a stable dividend approach such as US Dividend Aristocrats.
In the month of November, US equities have accelerated the recovery, adding 11% in the S&P® 500 Index to bring the total year-to-date gain to a cumulative 14%. This is quite the move, considering the index was down nearly 20% at the end of the first quarter. No doubt we can attribute much of this November acceleration to the news from Pfizer (and Moderna*, etc.) of positive advancements towards a COVID-19 vaccine.
However, what has been different about the November rally is the source of the advancement. Since the market bottom on 23 March 2020, the Technology sector (+14.41%**) was driving the recovery, while Financials and Energy were relative laggards.2 The November rally was broad based. In just the two weeks since the Pfizer announcement, 59% of the market return contribution comes from Financials and Energy – despite these sectors only making up a quarter of the overall index exposure. This has led many market commentators to question whether the time is now to go ‘all in’ on cyclical value.
In addition to the momentum of positive sentiment brought about by the vaccine news, US equities are also recovering from the settling of the US elections and the resulting clarity. Last week, president-elect Biden announced his intention to nominate former Federal Reserve Chair Janet Yellen to serve as the next Secretary of the US Treasury. Like the vaccine news, this announcement was largely received as a positive for markets. A Yellen-led Treasury is viewed as supportive for US Equities in that she will support a coordinated approach to furthering accommodative policies, as the economy continues its road to recovery following the pandemic. Yellen’s presumed nomination may also suggest that the Biden administration favourably views the current direction of the Federal Reserve, under Jerome Powell, given its logical extension of actions taken under the previous Yellen regime.
Despite the dual stimulus to market sentiment of positive vaccine developments and insights on key appointments, equity prices still remain susceptible to pull backs in the shorter term. A vaccine will need to be approved, distributed and administered before we see large groups of people returning to work. Each step presents challenges that are likely to cause uncertainty to persist. In the US specifically, COVID-19 spread continues to produce troubling metrics and this is likely to get worse following the Thanksgiving holiday, when people congregate indoors at higher levels.
Timing and procedural risks also exist in the government transition from the Tump to the Biden administration. The political transition is less dire than pandemic solution, but both present risks to investors of short-term volatility, suggesting the ‘all in’ cyclical value trade may be more of the 2021 story.
A stable dividend yield strategy – such as the US Dividend Aristocrats Index – combines the opportunity to both play a long-term economic recovery while also using the yield stability to help protect against short-term spikes in volatility. Investors are starting to put this trade back on. Figure 1 shows investors have been returning to yield, looking at both ETF flows and the underlying stocks, albeit at a cautious pace. Flows into both are still net negative year to date.
SPDR offers two ETFs through which investors can access the themes above. To learn more about these ETFs, and to view full performance histories, please click on the links below.
Sources: Bloomberg Finance L.P., for the period 19-26 November 2020. Flows are as of date indicated and should not be relied upon as current thereafter.
* This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security show.
1Source: Pfizer Inc. Pfizer and BioNTech Announce Vaccine Candidate Against COVID-19 Achieved Success in First Interim Analysis from Phase 3 Study, 9 November 2020. (Press Release).
2Source: State Street Global Advisors, FactSet, as of 30 October 2020.
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