Merchants worry that vaccine complacency is the brand new threat to the market
Is a vaccine the real risk to the market?
Stocks are trading within 1% to 2% of their historical highs as it is believed that some form of stimulus will come, the elections will not be in chaos, and an effective vaccine will be available in early 2021.
Five vaccines – from Moderna, AstraZeneca, Pfizer, Johnson & Johnson, and Novavax – are in or beginning phase 3 trials. The Food and Drug Administration has set a vaccine to be at least 50% effective.
However, UBS's Art Cashin believes that the market may be way too complacent in believing that a highly potent vaccine is imminent.
"The market action is now not about revenue, it's about the vaccine and the economy," said Cashin. "The problem is, the markets think (a vaccine) is a binary event, like turning a switch on, and suddenly we're all going to go to theaters again. It couldn't be like that."
Even Dr. Anthony Fauci, head of the National Institute for Allergy and Infectious Diseases, admits he doesn't know how effective a vaccine will be. "We don't know if it will be 50% or 60%," Fauci said at a Brown University event in August. "I want it to be 75% or more," but that may not be realistic, he added.
Oppenheim-based biotech analyst Hartaj Singh is optimistic: "The effectiveness of the vaccine could be between 80% and 90% and between 60%. My guess is somewhere in the middle (~ 70%)," he said in an email. "This virus is a sensitive animal. And new to us."
Michael Yee, Jefferies Managing Director and Biotech Analyst, hopes the results will be over 50% efficacy for one or more of the studies: "All biotech and health professionals in my area would rate the mid-60% result as positive Result, "he said. "The higher the (effectiveness) rate, the better the market sentiment will be."
He did admit, however, that the market hasn't priced in any disappointments worth mentioning: "The market will worry if we go into November and December and we haven't heard," he said, adding that stocks were not built at all for a mistake. "If we have efficacy rates for all outcomes in the 1940s, it would be a huge disappointment and the markets would certainly be a problem."
It's not hard to see why. The markets are anticipating a significant reopening of the economy from the first quarter of 2021 and a more pronounced expansion in the second quarter. Profit estimates reflect this optimism:
S&P 500 result: 2021 (estimates from previous year)
However, as Cashin points out, without an effective vaccine, those estimates are clearly too optimistic. Should effectiveness rates be relatively low, health recovery could be much slower than expected and would certainly further delay the recovery of the economy until 2021 and likely until 2022.
Even with one or more successful vaccines, enormous logistics and distribution problems, as well as high skepticism about a vaccine among a small but significant segment of the US population, must be overcome.
Because of this, many traders believe that there is now a higher risk of a low rate of effectiveness than stimuli. "If the current economy continues 'stop / start, stop / start' until 1H21, which could be possible with the above factors, valuations may be over-optimistic," said Singh von Oppenheimer.
However, not everyone is convinced that even a less than robust presentation in the vaccine trials would put a permanent strain on the markets.
Jim Paulsen, Chief Investment Strategist at Leuthold, was and remains optimistic in 2021: "It seems to me much more likely that we will receive treatments that significantly reduce the mortality of the virus and symptoms rather than receiving a panacea." immediately, "he said." It's entirely possible that the economy will grow at a decent pace in 2021, even if there isn't a fully effective vaccine. We underestimate how the economy and the virus can coexist and how all these impulses are delayed. "
Yee agrees, and while he says he understands how markets will now affect vaccination results, he urges investors to keep calm. "We have a high expectation that we will get a positive result on at least one of the tests, and that is what the markets expect," he said.
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Correction: In a previous version, Michael Yee's last name was misspelled in two references.