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How a COVID-19 Vaccine Could Hurt Your Portfolio

Joel Anderson

Since March, Americans have been clasping their hands and praying to whatever higher power they respect for the medical community to deliver a get-out-of-jail-free card to the country. An effective vaccine for COVID-19 could mean finally squelching the virus, allowing people to venture out to bars with friends, return to school or work or attend a baseball game or a concert. And more than anything else, it would mean a massive boost for an economy that the virus has made ill.

However, while the economy undoubtedly will benefit from the creation of a vaccine — and stocks likely will jump overall — not every investment will gain from an end to this long ordeal. In fact, given the dynamics of financial markets, portfolios that have been fine-tuned to react to the present pandemic could take a serious hit once the crisis comes to an end. If you’ve spent the past six months furiously shifting assets to create your perfect COVID-19 portfolio, you most likely will have a lot less than six months to reverse course after the announcement of a successful vaccine. And if you have overcommitted in certain areas, that could mean that this great news would be bad for your portfolio.

So how could a coronavirus vaccine actually hurt some investments? Here’s a closer look at some positions that could get awkward when the pandemic lifts.

Last updated: Sept. 1, 2020

Supply and Demand, Meet Demand and Supply

It can be a little abstract thinking about markets, but one way to cut through some of the noise is to remember that supply and demand matter in more ways than one. Not only are you thinking about the demand in the market for a product each company supplies, but investors also are driven by supply and demand. There are plenty of investment advisors and investment bankers who are always looking for a safe place to park their money, and when one asset type is doing poorly, it usually means another will benefit as those people move their money. So, when stocks go up, bonds usually go down as investors chase better returns. When stocks are crashing, investors flood into bonds for their safety.

So, when you’re thinking about how a coronavirus vaccine could play out in markets, it’s important to think both in terms of how it might change consumer demand and investor demand because both matter in determining which investments might take a hit from an end to the pandemic.

If You’re Heavily Invested In… Big Tech

The biggest tech stocks have been on a tear for years, and the coronavirus pandemic appears to have bolstered this effect. With so many people needing to remain sequestered at home for long stretches, many companies that already were in the process of integrating products into the everyday lives of the average American have gotten a huge boost from a crisis that herded droves of new customers into their business out of need.

You Might Worry, Because…

It’s not as though these companies needed the pandemic to make a lot of money, but there’s certainly a lot of reason to believe that the enormous market caps of the biggest players in Silicon Valley are due for at least some deflation. One way to illustrate this is to consider that Apple, Microsoft, Alphabet, Facebook and Amazon account for a whopping 22.7% of total value of the S&P 500 — with Apple and Microsoft alone making up over one-tenth of the index. That’s one-fifth of the value coming from 1% of the companies.

All of this is to say that however solid you see these companies as being, that and more might already be priced into the stock. Once the U.S. economy opens back up vigorously, plenty of investors could take that as an opportunity to diversify and sell off some of their big tech holdings, letting a little air out of those valuations in the process.

If You’re Heavily Invested In… Defensive Stocks

One of the distinctions people use to categorize stocks is whether they’re “defensive” or “cyclical.” The terminology is meant to reflect how some businesses tend to hold up better to changes in the broader economy. Car companies, for instance, are a classic cyclical stock because hard times usually translate to very few people thinking about buying a car. Utilities, for example, might see a small decrease in demand when people are hard up, but for the most part, they are a stable investment. Consumers will continue to use electricity even when they’re having trouble paying other bills.

Find Out: The Biggest Stock Climbs and Falls of 2020 So Far

You Might Worry, Because…

If investors rotated assets out of cyclicals at the start of the crisis, that likely means they’re going to want to rotate back when things start to heat back up. Defensive stocks are ideal in a crisis, but they’re laggards with weak growth when times are good. If you rushed to shift cash into consumer staples earlier this year, you might want to start thinking about how and when to move back into the cyclical stocks that have been overlooked of late.

If You’re Heavily Invested In… the Wrong Healthcare Stock

The development of a functional coronavirus vaccine justifiably has been a fixation of the healthcare sector most of the year, and investors have poured money into companies that have claimed any sort of optimism about ultimate success. While it’s unclear just how much the company that produces the first vaccine for market ultimately will pocket in royalties, sales of said vaccine will be enormous and immediate, here and abroad.

You Might Worry, Because…

But while a coronavirus vaccine will be very good for the company that gets there first, it likely will be really, really bad for all of the others. The nature of investing in the biotech sector is an all-or-nothing proposition, as often as not. Getting 95% of the way to a cure usually translates to exactly $0, and that might be even more pronounced in this case as governments across the world aren’t likely to wait for the second effective vaccine to hit the market. If you have a lot of money tied up in companies developing coronavirus vaccines, you’re taking some big risks. Any company that has seen its value inflated by the possibility that it might be the first to create the vaccine will see that value head in the other direction quickly once it’s clear another manufacturer won the race.

If You’re Heavily Invested In… the Market Falling Further

Plenty of people are watching the stock market and scratching their heads right now, wondering why a crisis of this magnitude hasn’t resulted in more losses. Some might even be seeing a chance to use options or futures contracts to bet that reality is due to catch up to markets and send them tumbling. If some market watchers are right that the high-flying stock market is being driven by people who don’t recognize the risks, those sorts of bets could pay off in a big way.

Read More: Companies That Are ‘Too Big To Fail’ Due to Coronavirus

You Might Worry, Because…

Whether or not the S&P 500 hits record highs will be a moot point once a vaccine is available. With the prospect of things returning to normal, stocks are likely to avoid another crash and also add to gains, at least in the short term. If that happens, those options contracts won’t be worth the paper they’re (no longer) printed on. Unless you get that dip you’re anticipating, your losses will be limited but total.

If You’re Heavily Invested In… Short Bets

“Going short” means making a bet that a stock will go down. Basically, you agree to borrow shares from someone and return them at a later date. In the meantime, you sell those shares and pocket the money. If the stock price goes down, you’ll be able to buy back the same number of shares for less — pocketing the difference for a tidy profit. And with markets continuing to set records in spite of double-digit unemployment, that could have plenty of people trying to ensure that they’re ready for when the (hopefully disinfected) air gets let out of this bubble.

You Might Worry, Because…

Here’s a quote investors have heard more than a time or two: “Markets can remain irrational a lot longer than you and I can remain solvent.” This is to say that even if you’re right about all the reasons why a stock is overvalued, unless people agree with you in time, you’re still going to lose money. Anyone who’s seen the 2015 film “The Big Short” knows what happened. At least a few of the people who anticipated the housing crash in 2008 almost wound up losing money because it took everyone else so long to realize they were right.

And this is even more troubling when you undertake what’s known as a “naked short,” which is a short that’s not protected. In a normal investment, you can only lose as much as you initially invest. Stocks can’t go lower than zero, but your losses are limited to 100%. But when you invert that, your losses are theoretically unlimited. The higher that stock goes, the more money you lose.

And that also produces the danger of a “short squeeze.” This occurs when a stock continues going up fast enough that the “shorts” — watching as they lose more and more money — crack and rush to buy up the shares they need to cover their short bets and return the shares to the original owner. This buying spree only drives prices higher in the process. So even if your clever analysis is spot on and the stock crashes hard, if it’s a week after you got stuck in a short squeeze you’ll still lose a fortune.

If You’re Heavily Invested In… Consumer Goods Stocks

Consumer goods have been experiencing a real Renaissance during the pandemic. With people stuck at home, there’s been a greater demand for a lot of the basics you rely on when you’re staying in. And the demand has shifted as Americans work at home. A lot of goods that used to be sold to businesses now are going straight to consumers. Throw in a major surge of panic buying in March, and a lot of companies that provide the various products you need to get through the day are seeing huge sales and soaring stock prices.

You Might Worry, Because…

When you’re talking about consumer staples, you’re not usually thinking in terms of massive spikes in sales over the short term. A company such as Clorox — stores haven’t been able to keep the brand’s disinfecting wipes in stock since the pandemic began — is really about consistency, supplying a product people will continue to need over time. It wouldn’t be surprising to see some of the gains Clorox clocked during the first half of the year evaporate once America appears to be headed back to normalcy — and the same is true for many other companies.

If you spent this spring chasing brands that experienced a big spike in sales to add to your portfolio, you might be well-served to review some of those holdings to consider whether they’re still a value at their current price even after the economy opens up further.

If You’re Heavily Invested In… Gold

While the idea that the modern economy will collapse or otherwise stop working is a far-fetched one, there remains a group of people known as “gold bugs” who see gold as a more stable place to hold your money when times are especially chaotic — sort of the investing version of stocking up on bottled water and toilet paper as a pandemic approaches.

Whether or not the gold bugs are right, the response for markets becomes self-fulfilling. Uncertain times frequently can lead to a big run-up in the price of gold, and even if you don’t personally believe that fiat currency is due to collapse, you still can make money by following the people who do. Although gold has soared to nearly $2,000 an ounce from about $1,300 an ounce at the start of 2019, plenty of people might have decided to play it really safe by going with the oldest investment there is.

You Might Worry, Because…

There’s no way of knowing just how much of the gold buying has been driven by gold bugs who have convinced themselves paper money will be useless in a few months and how much has been driven by the commodities traders who approach gold just like any other resource. However, if you look at the price chart around the housing crisis — when gold roughly doubled in value from 2009-11 only to crash from about $1,900 an ounce to about $1,200 an ounce from 2012-14 — it might give a hint as to why it’s back up around $1,900 an ounce at the moment.

If you’re invested heavily in gold, you might anticipate a sell-off once a vaccine is announced. The rise seems too closely correlated to the pandemic to be a total coincidence, and people who rushed into their position in a panic probably aren’t going to stick around once they calm down.

Unless of Course, the Opposite Happens...

Unfortunately, while a lot can be done to anticipate how the millions of people out there investing will react to a certain bit of news, it’s also important to remember that there are no sure things. Sometimes a trend that has seemed rock-solid for decades suddenly doesn’t hold up, or markets just shift their perspective about certain events over time and react in ways that you couldn’t have predicted.

So while you might start trying to vaccine-proof your portfolio, it also might be worth thinking about investing strategies that aren’t quite as dependent on you being glued to the news and making decisions as a result. A diversified, balanced portfolio should be able to get you through good times and bad without needing to constantly move assets to react to current events.

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This article originally appeared on GOBankingRates.com: How a COVID-19 Vaccine Could Hurt Your Portfolio