The first real hope at ending the global coronavirus pandemic was announced on Monday. Drug company partners, Pfizer and BioNTech, announced their COVID-19 vaccine, which exceeded expectations. The news sent world stock markets screaming higher.
Later in the week, some profit-taking developed, but overall, the news was met with relief and cautious excitement. Most investors expected the Pfizer drug would be, at best, 60-70% effective, so when the company announced it was more than 90% effective in preventing COVID-19, stocks soared.
While this was great news, there are a few drawbacks to the vaccine. For starters, Pfizer can manufacture only a limited quantity of the vaccine next year. Analysts are using a guesstimate of 1.3 billion doses. If that sounds like a lot, it is, but much of that supply (80%) is already spoken for by the U.S., Canada, Japan, the E.U. and the U.K. Second, in order for the vaccine to work, you need two doses. The most optimistic assessment is that no more than 12 million vaccine treatments could be available by the first quarter of next year.
The other issue with the vaccine is that it needs to be maintained, stored, and transported at really low temperatures—minus 176 degrees Fahrenheit. To give you an idea of what that means, your typical American freezer runs at about zero degrees Fahrenheit. As such, in order to be effective, the vaccine requires a super-cold freezer, which is unavailable in most hospitals, clinics, and doctor’s offices and that’s in a developed world country. Low and middle-income nations (think emerging markets) would not be able to take advantage of this vaccine easily, even if it were available to them in 2021.
Some of the market’s euphoria wore off as the facts became known, but it was interesting to watch which market sectors did well, and which didn’t, as the week progressed. Cyclical areas of the market and value plays did the best on Monday and Tuesday. Small-cap stocks and financials also led the indexes higher. Interest rates on long-term bonds rose, while gold and silver plummeted. Technology shares, long the market leaders, also sat this one out.
This all made some sense. A successfully administered vaccine would ultimately put an end to the pandemic. In turn, global economies would begin to rise. Those sectors that had been hurt the worst by the coronavirus would benefit the most, while the “defensive plays”—stay-at-home stocks and technology shares—would no longer be the only game in town.
Higher economic growth would also mean greater inflation risk, so bond holders would want a somewhat higher rate of interest to compensate for that possibility. Higher rates are good for financials, so bank stocks gained.
As is usually the case, once investor excitement dissipated a bit, profit-taking set in during the latter part of the week. Traders snapped up some oversold tech shares, while taking profits in some airlines, cruise lines, and the like. The question is what happens next?
As readers are aware, I have been warning for months to expect a pandemic “dark winter” in the U.S. and some other parts of the world. In November so far, more than one million new cases of COVID-19 have been confirmed throughout the U.S. It will likely get worse. Should lockdowns nationwide occur, or more likely, selected closings on a state-by-state basis (which is happening as I write this), it could hurt investor sentiment, as well as economic growth and employment. That may keep a lid on the averages in the short-term.
As a contrarian, the recent surge in optimism in the AAII Investor sentiment Survey is also somewhat troubling. Bullish sentiment improved by 17.9% last week. That brings the number of bulls to 55.8%. That is a seven-month high, while the number of bears declined to 24.9%. Those numbers make me cautious in the short run.
As for politics, in the face of the worst surge in coronavirus cases and deaths thus far, there is silence from the White House. I won’t comment other than to say that the markets have already given their verdict, and nothing that has transpired this week has changed that narrative. Market catalysts that could drive the markets higher would be good news in addition to vaccines, which is expected, and some progress on a stimulus package to help the nation through the next few months. I expect one, or maybe both, to happen, although a stimulus breakthrough is a long shot. Until then, expect some volatility. I still believe we continue higher through the end of the year. For now, let’s pencil in a possible S&P 500 Index target of 3,800.