Investors should consider the risk that a successful coronavirus vaccine will disrupt markets by triggering a selloff of bonds and a technology shift to cyclical stocks, according to Goldman Sachs Group Inc.
The greater likelihood of a vaccine approved by the end of November is undervalued by equity markets, strategists, including Kamakshya Trivedi, wrote in a note Wednesday. Over the next several months, the ramifications of the US elections and the evolution of the virus, in part as schools reopen, are likely to be key market drivers, they said.
The approval of a vaccine could “challenge market assumptions about both cyclicality and eternally negative real rates,” the team wrote, adding that such a scenario may support steeper yield curves, traditional cyclicals and banks, while challenges the leadership of technology stocks.
If this happened in conjunction with a change in US management, emerging market stocks could benefit “if trade policy risks decrease while US fiscal risks increase,” according to the note.
While strategists suggested that it may be too early for investors to aggressively position themselves for such a change, they recommended options trading as a way to play the game. For example, some call options on the S&P 500 still look attractive, and Goldman sees a rise around the 3,700 level in case there is an early shot.
That compares with a potential downside target of 2,200 in case there is a significant reversal of activity from a second wave of the virus, the strategists added. The US benchmark closed just under 3,328 on Wednesday. The Goldman team was more direct in maintaining its bearish view on the dollar.
