Encouraging news about COVID-19 vaccines has boosted hope for stronger economic growth, kicking off a rotation in stocks and equity sectors as investors look to a brighter future. However, near-term volatility is possible, as we’re not yet out of the coronavirus tunnel.

Nonetheless, investor focus has shifted toward more-cyclical sectors that tend to perform well when the economy is improving, such as Financials, Energy, Information Technology and Consumer Discretionary. Investors also have begun to move beyond the “big five” stocks (by market capitalization) in the S&P 500—Apple, Microsoft, Amazon, Facebook and Alphabet/Google—which outperformed during the earlier pandemic period.

Globally, emerging-market stocks have begun to outpace international developed stocks and U.S. stocks, another sign of rotation and a possible signal of things to come in 2021. A similar turning has been seen in the fixed income market, where emerging-market and high-yield bonds have outperformed U.S. Treasuries in recent months.

U.S. stocks and economy: A broad market rotation

Despite brighter days on the horizon, as we approach the end of the year, the economic recovery has narrowed and economic growth in the near term is likely to struggle. The coronavirus continues to spread at a rapid pace, with an increase in hospitalizations and deaths unfortunately following close behind. As you can see in the chart below, the third wave has pushed the United States to fresh records for all three.

COVID-19 cases, hospitalizations, and deaths are still rising

Source: Charles Schwab, Bloomberg, as of 12/9/2020.

The reported success of vaccine trials by Pfizer, Moderna, and Oxford/AstraZeneca has boosted enthusiasm about a sooner-than-expected rebound in economic growth (and subsequent return to normal activity). However, various manufacturing and logistical issues still threaten an effective rollout of the vaccine, not to mention the difficulty in forecasting the public acceptance and true effectiveness of each vaccine.