by Victor Ferreira
U.S. indexes briefly reached all-time highs on Monday after Pfizer Inc. revealed its developmental COVID-19 vaccine had been more than 90 per cent effective in preventing infection, but market analysts are preaching caution for the road ahead.
When investors received the news they’d been waiting for since COVID-19 first devastated their portfolios in March, they reacted as expected, with jubilation. The Dow Jones Industrial Average shot up by 834 points, a near-three-per-cent move, while the S&P 500 and S&P/TSX Composite Index each closed 1.1 per cent higher.
The biggest winners on the day had been, until that point, the biggest losers. Energy stocks such as Cenovus Energy Inc, Vermilion Energy Inc. and Suncor Energy Inc. each surged between 20 and 30 per cent. Cruise line stocks such as Royal Caribbean Cruises Ltd. and Norwegian Cruise Line Holdings Ltd. each closed with single-day gains above 25 per cent and airlines such as Air Canada, up 28 per cent, followed suit. And for the first time in months, REITs were a hot commodity again.
“I don’t know if some of these moves are fully warranted,” said Norman Levine, managing director of Portfolio Management Corp.
Levine is cautious because he suspects a high percentage of the returns were generated by short coverings. There’s no reason, he said, for energy stocks to have rallied as hard as they did. He also wonders about whether investors have fully assessed the risk in travel stocks such as cruise lines, airlines, hotels and casinos. The World Health Organization said Monday the vaccine could be rolled out in March to the highest-risk groups and by then, Levine said, these companies will have lost the winter travel season.
There is also uncertainty surrounding the vaccine. Will it be approved? If it is, will the rollout begin in March or will there be delays? Will its success rate hold up? How long will those who have been inoculated be safe? The answers to these questions could have a profound impact on markets.
“It’s great Pfizer is having great results, but it hasn’t been approved yet, you don’t know when it’s going to be available, how many vaccines will be available or what’s happening with the other companies,” said Levine. “Let’s be happy, but let’s not get carried away.”
Real estate stocks were among the market’s best performers on Monday, but Vision Capital Corp. CEO Jeff Olin doesn’t expect that trend will continue, at least within a few sub-sectors in the space. REITs with exposure to either retail or office were already in the midst of a downtown before the pandemic and the past few months have seen it accelerate, Olin said.
Speaking of office REITs, Olin said that the past 20 years have seen employers substantially reduce office space to 160 sq. ft. per employee from 360 sq. ft. per employee. During the pandemic, some of the top firms in both the U.S. and Canada, including Shopify Inc., Bank of Montreal and Facebook Inc., have each noted how successful the work-from-home transitions have been. Once a vaccine is in play, Olin suspects they won’t be using the same amount of office space as they did before.
A similar transition has been playing out in the malls, Olin said. As a percentage of total retail sales, e-commerce has gone from 15 per cent to 25 per cent during last March and April, he said. That change was going to happen with a pandemic or without one, he says. Next year, he suspects it’ll be closer to 30 per cent.
These two sub-sectors “might continue (to rally) for a day or two but then reality is going to set in,” Olin said. “As a long/short fund we’ll wait for these things to elevate and we’ll see that as a good shorting opportunity.”
Citi analyst Stephen Trent had similar reservations about Air Canada’s performance. The vaccine news is certainly a positive signal for the company’s medium-to-long-term outlook, but in the short-term, investors would do well to remember that the airline will only be operating at 25 per cent of its pre-pandemic capacity in the fourth quarter of this year.
Unlike some of the major U.S. airlines, Air Canada has substantial exposure to long haul and international flights. It will be, at least, several quarters before those come back. Until then, it seems as if the company is in for more of what it reported in its third quarter: A $685 million loss.
“We’re not going to wave a magic wand and be back to normal next week,” said Trent.