The mother of all rotations

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In a study of 94 Corona patients, the vaccine from Pfizer and partner BioNTech was found to be 90% effective. That result was good for one of the largest sector rotations ever. Equities benefiting from the Corona crisis were under pressure and the previous losers saw a spectacular recovery in price. Especially the BEACH shares (Booking, Entertainment & Live Events, Airlines, Cruises & Casinos, Hotels & Resorts) finally saw light at the end of the tunnel. Zoom fell by more than 10 percent, while Uber rose by more than 10 percent. All in one day.

Yet the arrival of a vaccine is not a binary event. In recent months, more and more reports have been published on the possible consequences of a vaccine on the stock market. The emphasis in those reports was mainly on the positive effects on cyclical stocks. Most analysts assumed that by the end of the year there would be sufficient Phase 3 results from different vaccines, after which one or more vaccines would be approved a few months later. Pfizer and BioNtech are now completing Phase 3 with research among approximately 44,000 people. The FDA will wait another few months to find out more about the undesirable effects of the vaccine, but this news has allowed investors to look through the valley. There is a world after the Corona crisis. It will be some time before there are enough doses, but apparently, BEACH shares have a future too. On balance, it is little more than a long-term but one-off negative event.

This rotation could be given an extra boost as soon as a new fiscal package arrives. In the United States, this has been under negotiation since the summer. The presidential elections have delayed this package. Now everyone seems to be counting on the package not being adopted in the new Congress until the end of January and, what is more, in a watered-down form. However, the majority of Republicans in the Senate are small, and only a few well-meaning Republican senators are needed for a much firmer package, possibly even for the inauguration of the new President. A comprehensive fiscal package will further raise interest rates and weaken the US dollar, the signal that investors in more cyclical equities are waiting for.

A vaccine is good news for the many patients and also good news for the economy. The question is whether a vaccine is also good news for the stock market in the long term. With the recovery of the economy, the need for central bankers to intervene will diminish. After all, the economy and liquidity are communicating vessels. The main purpose of the intervention earlier this year was to preserve financial stability, and that has been very successful. The side effect was a strong recovery in the stock market, driven by the dual liquidity of central bankers and governments. With the recovery of the economy and the approaching end of the Corona crisis, central banks can afford to take a step back. Fortunately, they no longer steer for inflation. On the contrary, inflation is seen as the solution to over-indebtedness. Inflation must rise to a level that will never again be deflationary. The era of monetary and economic philosophy has come to an end, and we are going to try again with Keynes. Large infrastructural projects, additional public spending, increasing public debt, and a central bank that not only allows it but even stimulates it, if necessary with the help of monetary financing. That can ensure that this sector rotation is not a one-hit-wonder. It will continue to be a special stock market year in more ways than one.

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