HH To Vaccine Or Not - Time To Pick A Side (For Your Portfolio)

The market is pricing in an economic recovery after the vaccines go out. It sounds nice to want to hedge your bet because it’s uncertain if the vaccines will get distributed effectively, but that diminishes your return potential. If you want to make outsized gains, you need to pick a side. It’s perfectly fine to bet against COVID-19 being dealt with properly. You can make money either way if you are right. You are assured mediocre returns if you hedge, depending on what your time frame is of course. That’s logical because you aren’t taking much of a risk if you hedge. By the time COVID-19 is beaten, there will be very little profits to be had in the reopening plays, assuming the market prices it in ahead of time. You need to take risk to make money.

Of course, the market isn’t only impacted by the virus. Certain companies and macro bets are more sensitive than others. The table above goes through a few of the potential tailwinds and headwinds the market faces. Besides the virus, investors need to worry about monetary policy, fiscal policy, and the cycle. It all keys off the virus of course. However, you don’t want to take your eye off these factors as well. It’s especially worth reviewing them because we all have better experience dealing with them.

Even if you were wrong about the virus in the spring (in believing it would be over quickly), you still turned a profit on the long side because of help from the Fed, changing sentiment, the resiliency of the economy, and fiscal stimulus. That’s not to ignore the fact that uncertainty over COVID-19 diminished throughout the year which helped boost sentiment. It’s key to know who you are playing against in markets just like in poker. 2020 has been the year of retail investors which means you must also consider what they are thinking (or not thinking).

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