BofA Says Covid-19 Vaccine Can Mark ‘Big Top’ for Equity Rally

The announcement of a Covid-19 vaccine would likely mark the “big top” for the rally in stocks and credit markets, according to Bank of America Corp.

With a surge in risk assets having recently pushed the S&P 500 Index to a record high, confirmation of a breakthrough along with a major recovery in jobs are needed to put a cap on the rally, strategists led by Michael Hartnett say. They point out that while the market consensus is bullish, cross-asset positioning remains neutral rather than “excessively” optimistic.

Writing in a note, the strategists also warn of the growing risk of a market correction and rising volatility as the U.S. election approaches, advising that investors hedge their exposure via high-yield and emerging-market bonds and income equities, such as utilities, real estate investment trusts and dividend exchange-traded funds. The strategists forecast the S&P 500 will reach 3,630 prior to the U.S. vote -- about 5% higher than Thursday’s close.

BofA Says Covid-19 Vaccine Can Mark ‘Big Top’ for Equity Rally

A sell-off in major technology stocks put investors on edge Thursday after the Nasdaq 100 Index sank 5.2% in its worst day since the depths of the pandemic. According to BofA, vaccine optimism could mark the end of tech dominance, boost the appeal of cheaper value shares and push yields higher.

In addition to powerful stimulus measures, expectations of a Covid-19 treatment have helped fuel gains in equities in recent weeks. BofA’s August fund-manager survey showed that institutional investors expect a vaccine announcement to happen early in the first quarter of 2021.

Katherine Davidson, a portfolio manager of global and international equities at Schroders, cautions that investors may be getting ahead of themselves in their optimism on the timing of a virus breakthrough.

“There’s quite a lot priced in at the moment and there’s a real risk that we don’t get a vaccine this year,” Davidson said by phone.

At the same time, she doesn’t expect a major sell-off in stocks if an announcement doesn’t come in the next few months because investor choices are limited by low returns from bonds and cash.

“I find it hard to see a market collapse scenario if we don’t get a vaccine before the end of the year because I don’t know where the money would go,” Davidson said. “Everyone is stuck in that position where we all feel like things are a little bit overheated, but there’s no alternative and there’s so much support from monetary policy.”

©2020 Bloomberg L.P.

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