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Market Extra: Why stock-market bulls can’t ignore rising COVID cases despite vaccine euphoria

Progress toward a vaccine for COVID-19 is undeniably good news, but U.S. stocks could falter if politicians can't come up with a post-election deal on another round of aid spending to shore up a bruised economy, some investors fear. Read More...
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Progress toward a vaccine for COVID-19 is undeniably good news, but U.S. stocks could falter if politicians can’t come up with a post-election deal on another round of aid spending to shore up a bruised economy, some investors fear.

“We do think it’s really important,” said Eric Freedman, chief investment officer of U.S. Bank Wealth Management, in an interview. “I don’t know if I’d say its’ essential in the next couple weeks, but at the least a signal” that a package is in the works would reassure investors heading into what could be a rough first quarter for consumers without another round of financial aid.

Meanwhile, some investors wonder whether good news on the vaccine front could translate into bad news for stocks, if it undercuts prospects for another round of fiscal stimulus from Washington.

The focus in markets early this week turned to vaccine prospects after Pfizer Inc. PFE, -0.68% and Germany-based BioNTech SE BNTX, -2.57% early Monday announced their COVID-19 candidate was more than 90% effective in preventing infections.

That set off ructions in markets, with previously beaten-down cyclical stocks, whose fortunes are more closely tied to the economic cycle, surging as investors dumped 2020’s biggest highfliers, including large-cap technology stocks that have been seen as the biggest beneficiaries of the stay-at-home phenomenon.

Among previous laggards, the small-cap Russell 2000 RUT, -0.31% rallied 5.7% over the first two sessions of the week, while the tech-heavy Nasdaq Composite COMP, +1.81% was down 2.9% and the more concentrated Nasdaq-100 Index NDX, +2.08% fell 3.9%. The Dow Jones Industrial Average DJIA, +0.28% was up 3.9% for the week through Tuesday, while the S&P 500 SPX, +0.88% was up around 1%.

Read: Investors need to brace for a ‘violent rotation’ into cyclicals, value stocks, says Lee

Some of those rotational moves were being reversed Wednesday, with the Dow trading near unchanged and the Nasdaq rising 1.6%.

While investors are cheered by positive vaccine news, the question for investors is how consumers can bridge the gap between now and when an approved drug begins to get distributed. That might not occur until at least the second quarter, which “puts the onus on Congress to do something,” Freedman said.

Investors, in the run-up to the election, were paying close attention to fiscal stimulus prospects as fraught negotiations between the Trump administration and House Democrats remained stalled. And even had their been a breakthrough, Senate Republicans were signaling resistance to the multi-trillion dollar packages being considered by the White House and Democratic lawmakers.

At issue was whether the economy would need a boost to get through the winter on fears the economic rebound from the second quarter’s implosion would lose steam as consumers tapped savings and a rise in COVID-19 cases curtailed consumer and business activity.

The issue may become more urgent as the number of new COVID-19 cases accelerates. The U.S. has averaged 116,447 cases a day in the past week, up 64% from two weeks ago. Cases were on the rise in 47 states, with at least 12 setting records on Monday. New cases were highest in North Dakota, South Dakota, Iowa and Wisconsin, pushing hospitals to capacity and raising concerns that health-care systems could be overwhelmed.

See: The U.S. has already had more than 1 million new COVID cases in November

Some economists contend the economy remains in a V-shaped rebound and that the underlying fundamentals remain robust.

“Although there is still some near-term risk of increased government-imposed lockdowns due to the weather and the lag between development and broad distribution of a vaccine, the promise of a highly effective vaccine significantly reduces the need for a large phase four stimulus bill,” said Steven Ricchiuto, U.S. chief economist at Mizuho Securities U.S.A., in a note.

“Not only has the economic recovery been much more robust than the doom and gloom crowd had been anticipating, but incoming data suggest the positive economic momentum has carried over into the fourth quarter,” he said.

A stronger-than-expected October jobs report reinforced the recovery argument, economists said.

“Our Q4 baseline estimate for growth (sans fiscal stimulus) has long been +1.5% but as we said, the upside scenario could easily push this toward +7%,” wrote Tom Porcelli, chief U.S. economist at RBC Capital Markets, in a Monday note. “If this materializes we would be back to the pre-COVID level of growth right around the turn of the year.”

Still, with more than 3.5 million Americans now out of work for 27 weeks or longer, the need for action remains, other analysts said.

“We continue to believe that another package is needed to bridge the gap as we move through the tough winter months,” said Megan Horneman, director of portfolio strategy at Verdence Capital Advisors, in a note.

“ Unemployment remains elevated and despite the positive news on a vaccine, current COVID cases are rising,” she wrote.

But even those emphasizing what they see as the economy’s underlying resilience aren’t necessarily ruling out the need for more aid, but argued that vaccine prospects merely reduce the amount necessary to tide over households.

Ricchiuto said the argument for revisiting a program on the scale of the $3 trillion HEROES Act enacted in mid-May “has all but completely disappeared,” though there remains scope for another round of aid more in line with the $1 trillion to $1.5 trillion in temporary help for households, either in the form of a second round of refund checks or an extension of expanded jobless benefits.

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