The stock market is underpricing the probability of an approved COVID-19 vaccine by November, according to Goldman Sachs strategists. Their strategists believe that an approved vaccine could lead to a market crash.
Common sense calls for the opposite to be true, as a vaccine should be a boost for the economy. In fact, it actually is a boost for the economy.
The only problem in this scenario is that the real economy and the stock market are disconnected. They have been disconnected for quite a while.
The economy is in trouble, unemployment is high, households are struggling to cover their bills, and the federal reserve is printing trillions of dollars. The risk of inflation is the highest it’s been in decades.
All the while, the stock market is reaching new highs. There is a massive disconnect, a very unhealthy disconnect.
Most retail investors have overlooked the fact that new highs have largely been produced by the 6 tech giants, not the overall stock market.
The graphic below illustrates the performance of the S&P 500 including and excluding the 6 largest tech companies, all of which are tech companies that “benefitted” from the pandemic and lockdown.
There’s no denying that the 5 tech leaders have led the entire market rise.
The sideways moving chart excludes Apple, Amazon, Alphabet (Google), Microsoft, and Facebook.
The S&P 495 (excluding the 5 leaders), saw no significant price increase since the crash of March.
Below you’ll see the performance of the S&P 500. It is much better than the chart excluding the 5 tech leaders but much worse than the 5-stock-index.
Investors must pay attention to this.
The massive printing of capital (thank you Fed) logically pumped more money into these stocks. But that’s not the only reason; these 5 tech stocks saw extraordinary gains because they performed exceptionally well throughout the pandemic. People all over the world spent more time on the internet, and new WFH rules led to spending on consumer technology products that keep everyone connected.
That’s why Goldman Sachs strategists believe that a vaccine, which removes the key influences on the growth of those tech stocks, could cause the top 5 companies to face a decline in value.
As these 5 companies were largely responsible for the market uptrend, it will have an equally (if not stronger) effect on price declines.
Research firm Countach Research wrote an article on the risks of passive indexes in September 2019, which can be read here. In this analysis, the key concern was the risk of a selloff on the underlying assets of the S&P 500 index ETF.
A taste of this kind of fire sale was given in March when the market crashed by 30%. With the top 5 stocks reaching all-time-highs, and a key driving influence (the lockdown) being removed due to an approved vaccine, a similar decline could be ahead of us.
At a time of increasing risks amongst large-cap tech stocks, there is a rapidly increasing amount of opportunity to purchase value at smaller companies, i.e. micro-caps and small-caps. The smaller companies have been neglected for the past decade, and especially during this time of economic uncertainty.
As always, the market is a double-edged sword and returns don’t come for free.
Risk and opportunity can be found in any market, it just depends on where you’re looking.
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