Why You Should Approach The Stock Market's Rally With Caution

It's been a promising month or so for Wall Street following the news from Moderna Inc MRNA and the Pfizer Inc PFEBioNTech BNTX pair estimating that their COVID-19 vaccine candidates had been more than 90% effective during Phase 3 stage testing.

The S&P 500, Dow Jones, and Russell 2000 have all made new all-time highs in the weeks since, as investors have gotten more hopeful that the worst of the pandemic is behind us. This rising sentiment has come despite many analysts predicting that the S&P 500 could trade lower in the long term during a Joe Biden presidency. 

Travis McGhee, chief commercial officer at Nadex, noted prior to the election that equity indices such as the S&P 500 tend to “love a lower tax, lower regulation environment” which President Trump sought to provide during his four-year tenure. Yet the price of the S&P 500 has remained buoyant since the news of President-elect Biden's victory. Of course, the price of such equity indices also takes into account other market-moving factors such as the prospects of vaccinations and returning to a normal way of life in 2021.

Despite the positivity recently, there is a feeling among some that U.S. and European stocks could plateau in the coming weeks, given the tremendous amount of work remaining before anyone can claim the end of the pandemic.

Melinda Mills, director of the Leverhulme Centre for Demographic Science at the University of Oxford, said that it’s important to provide a clear distinction between the positive news on vaccine tests and the challenge of physically vaccinating the global population in the months ahead. “Vaccines and vaccination are two very different things,” warned Mills. She added that to achieve an “80% uptake” of vaccination to achieve “community protection”, governments need to get “serious” with public engagement strategies for 2021.

Even still, demand for well-established and emerging tech services and products looks set to decelerate in a reopening environment are lagging behind. "Work from home” tech stocks like Zoom Video Communications Inc. ZM are down 32% from its all-time high on October 19.

Aside from the obvious rise of vaccine stocks like Pfizer and AstraZeneca AZN, it’s the global hotel and airline stocks that have fared best since the Pfizer vaccine testing revelations. Major U.S. airlines like Delta Air Lines, Inc DAL and United Holdings, Inc UAL have soared, with the latter also in talks with the U.S. Treasury Department about extending its loan facility. Other reopening plays like Expedia Group Inc EXPE and Marriot International MAR have likewise rallied. 

While a safe and effective vaccine could prove the ultimate game-changer for the global travel sector, efficient inoculation campaigns are still weeks if not months away, which may temper any further enthusiasm for these shares at least in the short term.

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