Vaccines are coming, what’s next?

Pfizer, Moderna, AstraZeneca.

Three weeks and three potential vaccines with extremely promising Phase III trial results that likely mean the first vaccinations will start within a few weeks.

These are remarkable scientific achievements well worth reading more about, but I want to focus on what this means for financial markets.

After stumbling through the darkness of much of this year, market participants finally see the light at the end of the Covid-19 tunnel. With a vaccine almost certainly coming within the next six months, and even sooner for targeted at-risk groups like doctors, nurses and other frontline workers, as well as the elderly, we can now plan ahead for a return to normalcy by next summer.

For businesses, this means clarity on how to plan financially for the coming year and thinking about critical issues like rehiring furloughed workers or even expanding in the face of a dramatically improved economic outlook. For governments, this means looking past current stopgap measures to keep people and businesses afloat as we weather the current waves of infections to future policy necessary to jumpstart economies when things open back up. And for individuals, this gives a boost of confidence that they will be able to get back to work and start receiving the steady streams of income necessary for a resumption in consumer spending and normal economic activity.

And the performance of stocks so far in November reflect that.

In Europe, the Stoxx 600 index is up more than 14% this month, while the S&P 500 closed yesterday again at all-time-highs.

As the extent of these vaccine developments become clearer, investors will increasingly position themselves for summer of next year, not the dark winter that is just ahead.

It may seem absurd to take such an optimistic stance given the current record rate of infection in the United States and lockdowns in Europe that point to a not-so-festive holiday season. And there are plenty of other reasons to be pessimistic, just take your pick:

Vaccine concerns: No vaccines have ever been rushed through development like this before, raising concerns about their safety. Even if approved, how willing will people be to get vaccinated? And what happened if governments try to force them to do so? Apart from these moral concerns, the even bigger challenge will be producing and distributing the vaccines. The need for transport and storage at extremely cold temperatures requires entirely new shipping methods. The aviation industry is calling this the largest transport challenge ever, with the equivalent of 8,000 Boeing 747s flights needed for delivery.

Continuing bankruptcies: While central banks flooded the market with liquidity to stave off a financial crisis in March, the real economy is still suffering due to the plunge in economic activity. Even with the end in sight, companies still need cash flows to remain solvent and the longer we are still dealing with varying degrees of lockdown, the greater the risk of insolvency. For big and little companies alike, there will be more painful bankruptcies in the months ahead.

Lack of stimulus: The difficult situation this winter may be exacerbated by the inability of governments to enact further policy measures to buoy economies. Not facing the level of urgency we were in March, it is entirely likely that cooperation will break down and politics will get in the way of prudent policy. We are seeing that right now in Europe, where Hungary and Poland’s objection to the rule of law stipulations in the EU budget and coronavirus recovery fund are threatening the disbursement of funds. In the US, it seems less and less likely that a new stimulus package will be passed before Trump leaves office, which could be a stumbling block for economic recovery.

This is by no means an exhaustive list, but you get the idea. Are markets way ahead of reality and priced for a perfection we are unlikely to achieve? Some sectors and companies might be, but this is a loaded question with indefinite interpretations.

So instead, let’s focus on what is probably true and what is likely to happen.

Despite the stumbling block, further accommodative fiscal and monetary policy will be approved. Given the clearer timeline for getting past this crisis, not finding further support for the economy to bridge the gap over the next few months would risk stopping the recovery before it can get going. Policymakers have already spent incredible sums of money into existence this year in support of the economy, they are extremely unlikely to stop now.

Unlike the last crisis, much of this stimulus has come directly into the hands of consumers. But pandemic restrictions having prevented spending on services and things people prefer to buy in physical stores, so there is real pent-up demand in the economy that is waiting to be released as fear of the virus fades away. In the United States, the savings rate is at an all-time high. Expect that money to start being spent as the situation improves.

The Covid-19 crisis has exacerbated many of the already existing social issues such as inequality and structural unemployment in key sectors and demographics. These issues and others, like climate change, are ones that have simmered over the past decade but now can no longer be ignored. New policies that address these issues are already in the works or have been passed. Green infrastructure projects that can put people back to work and stimulate lower-income households who have a greater propensity to spend on real goods and services while also addressing environmental issues look especially enticing.

A strong mandate for the new Biden government will be to reduce economic inequality. Goldman Sachs believes that these policies will provide considerable economic stimulus. In their “REVing Up A Stuctural Bull Market” macroeconomic commentary from November 18th, they make the following argument:

“Covid is already ushering in a new era of policies aimed at social need instead of financial stability. This will likely create cyclically stronger, more commodity-intensive economic growth that should create the elusive cyclical upswing in demand.”

What’s more, they illustrate how just this sort of scenario played out in the Johnson presidency in the 1960s:

There is a saying in capital markets that one should “buy on rumor, and sell on news”, and surely, some will see the euphoria generated by positive vaccine news as an opportunity to take profits.

However, on deeper inspection, positive vaccine news is only one of several powerful trends that could be generating investor returns well into next year and beyond. And so while you might not necessarily equate revolutionary advances in biotechnology and supplies of vaccines with something as prosaic as commodities, we encourage you to look beyond the headlines, because that is where the best investment opportunities tend to hide.