Investors should consider the risk that markets getting rid of the coronavirus vaccine will disrupt bond markets and the rotation of technology in cyclical stocks, warned Goldman Sachs Group Inc.
The increased likelihood of an approved vaccine by the end of November is underestimated by equity markets and by then the outcome of the U.S. election will be known, strategists including Kamakshya Trivedi wrote in note Wednesday. Investors also know how the start of the school year allowed the coronavirus to spread, they said.
The approval of a vaccine could “challenge market assumptions about both cyclicality and about eternally negative real rates,”; the team wrote, adding that such a scenario could support higher yield curves, traditional cyclical banks and banks, while challenging the management of technology stocks.
If this happened in conjunction with a change in U.S. administration, emerging market equities could benefit “if trade policy risks decline while U.S. tax risks rising, “according to the note.
While strategists have suggested that it may be too early for investors to put themselves aggressively into such a change, they have recommended options trades as a means to play the theme. For example, some call options on the S&P 500 still look attractive, with Goldman looking upside to around the 3,700 level if there is an early vaccine.
This compares to a potential reduction of 2,200 if there is to be a significant reversal of activity from the second wave of the virus, strategists added. The U.S. benchmark closed just below 3,328 on Wednesday.
Goldman’s team was more direct when it maintained its bearish view on the dollar.
“The range of results is wide and our highest confidence is still in the continuing weakness in the US dollar,” they said.
(Updates with the S&P 500 level in the fifth paragraph.)