Pfizer and Moderna have recently announced that their vaccines are in the last stages of development, which provides hope to Wall Street amidst the COVID crisis. Both companies have claimed their vaccine is 95% effective.
The chief marketing strategist of Leuthold Group says that despite this great news, the US faces another huge challenge of repairing a collapsing economy.
The pandemic resulted in the largest output gap in the history of the US economy. The difference is between the actual current GDP and where the GDP is predicted to be if all resources are fully employed at regular productivity. It decreased to 11% but has now increased to 8% in the third quarter.
However, according to Paulson, his research suggests this could present a significant opportunity. He explains that the S&P 500 has gained 24.5% per year returns when the output gap is the lowest. This is more than double the gains of the stock market.
He further proceeds that there is a ray of hope amidst this coronavirus crisis because it will create an environment for investors that is ideal for the stock market. This is because it provides an opportunity to improve the output gap.
According to his research, historically, small-cap stocks and cyclical sectors are highly beneficial. He explains that when the output is at its largest, these present more benefits than other types of investments.
Small caps perform 7% better than large caps in this situation, Paulson reports. Currently, they are also performing better than the market. The Russell 2000 has increased to 15% whereas the S&P 500 has gained 11%.
He advises that dividend yield stocks shouldn’t be considered, as their performance won’t be up to the mark. He adds that price momentum also does not do well unless the output gap is returned to normal.
Paulsen is hopeful that the US economy can begin to repair despite the pandemic being unpredictable.
He adds that risk assets will perform well until the situation returns to normal. He emphasized that if we move forward with a comprehensive plan, we can utilize this opportunity to improve.