Is a vaccine the real risk to the market?
Stocks are within 1% to 2% of their historical highs as it is believed that: 1) stimuli will come in some form, 2) elections will not be in chaos, and 3) 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 now isn't about revenue, it's about the vaccine and the economy," Cashin told me. "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 yet know how high the effectiveness might be. We don't know whether it will be 50% or 60%," Fauci said at a Brown University event in August. "I want it to be 75% or more," Fauci said, but added that it may not be realistic.
Oppenheimer's biotech analyst Hartaj Singh is optimistic: "The vaccine's effectiveness could be between 80% and 90% and between 60%. My guess is somewhere in the middle (~ 70%)," he said in an email me. "This virus is a delicate animal. And new to us."
Michael Yee, Jefferies General Manager and Biotech Analyst, hopes the results will be over 50% efficacy for one or more of the studies: "All biotech and health workers in my area would consider the 60% result a positive result . " "he told me," the higher the 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 failure: "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. Earnings 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, there are enormous logistical and sales problems to overcome, as well as high levels of skepticism about a vaccine among a small but significant segment of the US population.
Because of this, many traders believe that there is now a higher risk of a low rate of effectiveness than stimuli. "(I) If the current economy continues 'stop / start, stop / start' until 1H21, which could be possible with the factors above, 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 told me." 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. "
Michael Lee agrees, and while he says he understands how the markets will now affect vaccination results, he urges investors to keep calm: "We have a high expectation that we will get one with at least one of the tests positive result, and that's what the markets expect, "said Lee.
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