Markets go up every time there is favorable news on progress towards a vaccine. Common wisdom seems to be the only thing holding the market back from new highs is the lack of a vaccine and, once we get one, the market will rip higher as everyone celebrates the “return to normalcy”.

But what if this is all wrong? Consider that nobody predicted the massive recovery off the March lows when pessimism ruled. In hindsight, what became clear is three factors have driven the market these past months: the Fed, the Treasury, and big Tech.

Easy money proved a cure to a lot of the underlying ills in the economy and encouraged risk taking due to the large safety net the Fed and Treasury created.

Tech has been the biggest beneficiary of the “stay at home trade” becoming an ever larger part of the market’s capitalization while the great majority of stocks have been largely flat.

The Post Vaccine Market

Now, visualize the day we find out a vaccine has proven effective. There will certainly be euphoria across the land. But what about in the markets?

People always say the market is forward looking. Another way to say that is the market focuses on “second order” effects, or what might be more commonly called unintended consequences.

The most obvious place to look for these second order effects might be the same place we found them recently: the Fed and the stay at home trade.

With a return to “normalcy”, the Fed will no longer need to prop up the economy and protect asset prices. As they pull back the throttle, risk tolerances will change: traders will become more cautious. There will be more sellers than buyers and prices will decline for all risk assets.

If that isn’t bad enough, let’s not forget the federal stimulus. There won’t be another round of Trillion $ spending programs. That will hit the working class and reduce retail spending. Lower retail spending means companies missing earnings. Earnings misses mean lower stock prices. Strike two.

Next, the big tech names will see demand slip. If the masses head back to the office, there is less need for Amazon, less time to watch Netflix, less time to scroll Facebook and Instagram. As these stocks go, so goes the market.

The big trade will be out of the tech leaders and into the “return to normal” names like restaurants and hotels and energy and store based retailers. However, on the margin, there will be more sellers of tech than buyers of out of favor names. There just isn’t enough market cap of the latter to go around, nor is there enough retail awareness.

You will be less exposed to the sell-off if you own the return to normal names, but the overall market averages will still head down. So the rotation out of tech is strike three.

But wait, we’re not done! After the vaccine euphoria, the new reality will set in. “Back to normal” won’t be completely normal.

Unemployment will still be double digit and take years to get back to where it was a year ago. Many businesses were permanently impaired and will either remain closed or come back with lower margins. The awareness that we will be in an economy that is closer to 2010 than 2018 will hurt valuations.

Finally, we will have to make peace with the fiscal deficits we created to keep people afloat while we waited for the vaccine. Taxes are going higher. Probably way higher. Inflation may finally return. These are not multiple enhancing features.

The Bittersweet Celebration

So, a month post-vaccine, this is what we are staring at: a retreating Fed, fiscal austerity, higher taxes, a rotation out of tech, and high unemployment combined with low disposable income. That is not a backdrop that makes people want to own stocks!

Should we all celebrate when the vaccine finally arrives? Of course! Just after you’ve popped the champagne and filled everyone’s glass, take a moment to sneak into the corner and put in some sell tickets!

Bonus Content: NBA Playoff Predictions

I haven’t had occasion to make a prediction in a while, so with the NBA playoffs starting I’ll get back in the action. For newer readers, I don’t make chalk predictions. I try to go against the grain a little bit (and sometimes a lot).

This is hard to do in the NBA because the favorites win so often or at least make the finals. It is rare for a team outside the top three seeds to win it all.

So, with that said, my “upset” is partly tied to story line. I’m calling for a Clippers-Raptors final, so both 2 seeds in the final. Kawhi will face his old team. That’s much more interesting to me than a Giannis-LeBron matchup (not so hot take: especially since Kawhi is a better all around player than either).

It would be fitting if the Raptors could repeat by beating Kawhi and I definitely think that’s possible, but it’s hard to bet against a healthy Kawhi in the playoffs, so I’ll go with the Clippers to win.