The Vaccine Race and Its Impact on the Markets
November 16, 2020
Michelle Holmes, CFA
AVP - Investments
When the global health pandemic started, many hoped the pandemic would be short-lived. We shut down the world economy for a few months and then life could return to normal by the summer. As the months dragged on, it became evident the pandemic wouldn't end until we reached herd immunity by way of contracting the COVID-19 virus or receiving a vaccine.
Thus, the race to create a vaccine began. Companies are developing vaccines in record time as they compete to be the first to market.
This is why the markets reacted so strongly last Monday to encouraging vaccine news. Pfizer announced that its vaccine has a 90 percent efficacy rate, and it has enough data to ask the FDA for emergency-use authorization this year. The efficiency may drop as the trial continues, but the rate is well ahead of the efficacy of the flu vaccine. The S&P 500 Index and the Dow Jones Industrial Average (Dow) reached new intraday highs on Monday. The yield on the 10-year US Treasury notes climbed to almost one percent.
Then on Monday morning, Moderna announced similar results for its vaccine trials — and the stock market is up on the news, with the Dow reaching a new record.
What does vaccine distribution look like?
Even if the FDA grants emergency use for a vaccine, it does not mean that the vast majority of people will receive a vaccination anytime soon. It will take some time to manufacture enough to vaccinate everyone. When a vaccine is available, the CDC plans to deliver doses based on the priority groups listed below. Higher priority groups such as health care personnel, essential workers and the elderly will receive vaccinations first. It could take several months to have enough vaccine doses for the rest of the population.
Source: J.P. Morgan Eye on the Markets
In the meantime, the US is heading into the winter months with record new daily infections and hospitalizations on the rise. This makes effective treatments for the virus important to bridge the gap between now and when a vaccine is widely available. We received positive news on this front last week as well. The FDA approved the antibody treatment developed by Eli Lilly and Company for use in treating the COVID-19 virus.
Why markets react to vaccine news:
In the short-term, markets react to all kinds of news. But in the long run, the economy is the biggest driver of market returns. The global pandemic caused a major recession early in the year when the global economy shut down. If the uptick in virus cases causes economies across the world to begin shutting down again, the economic recovery will take longer. The vaccine and new treatment options are positive news as both will allow the economic growth to continue.
The positive news on the treatment and vaccine options shifted the markets from the technology stocks that benefit from stay-at-home orders to value oriented stocks that benefit from an economic recovery. Some of the hardest hit areas of the stock market during the pandemic saw the biggest gains on Monday. As seen in the chart below, Carnival Corporation (a cruise line) had one of its best days after being down the most this year.
Where do we stand today?
The US economic recovery has defied expectations in terms of strength and quickness, but the pace of recovery has slowed in the last couple of months. The Federal Reserve is doing what it can to help the economy grow and vowed to remain accommodative for the foreseeable future. Another fiscal stimulus bill is in the works, however, the likelihood of reaching an agreement before the end of this year is waning.
The pace of the economic recovery through the winter months will depend on what happens with the COVID-19 virus — which is why the treatments and development of a vaccine are so important. As long as the economy can remain open through the winter months, the recovery can continue.
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