Here’s our take on the impact of the vaccines and where the recovery seems to be heading.
Our Top Market Takeaways for February 5, 2021.
Markets in a minute
It was all a dream
By Thursday evening, markets seemed to have woken up from the short-squeeze fever dream and remembered the main factors driving the action: stellar earnings from corporations, the prospect of more fiscal stimulus in the United States, and continued progress against COVID-19.
- On fiscal stimulus: Democrats are moving ahead with passing the next phase of COVID support and stimulus through the reconciliation process, which allows bills to go through an expedited process and doesn’t require the usual 60 votes to pass the Senate. Importantly, that probably introduces scope for a larger bill than we were expecting, and a price tag above $1 trillion seems likely. Bond markets seem to be reacting to this news. Inflation expectations are at or near their highest levels (and yield curves at their steepest levels) since at least 2018. Both signal that the bond market is becoming more optimistic about future growth and inflation.
- On earnings: Over half of S&P 500 companies have reported earnings for the fourth quarter of 2020, and they’re beating analyst expectations by almost 20%. If the remaining companies report merely at expectations, earnings in the last quarter of 2020 will be higher than they were in the last quarter of 2019 (which, if you needed me to remind you, was before we knew what COVID-19 was). The S&P 500 and U.S. small caps ended Thursday at all-time highs. GameStop was down over -80% from Monday through Thursday.
- On COVID-19 and vaccines: COVID-19 cases and hospitalizations are collapsing in the United States, the United Kingdom and across Europe. Vaccination progress is picking up, and most of Europe and the United States seem on track to get a first dose to 50% of the population by the end of the first half of the year. Given that most countries are prioritizing those who are most at-risk of severe disease, this could mean a quicker return to normal than seems currently imaginable from my snowed-in New York City apartment. In today’s Top Market Takeaways, we dig into our latest thinking around the virus and vaccines.
Our latest thinking on COVID-19 and vaccines
In our 2021 Outlook, we highlighted five key forces that we thought would define the global healing process. The first key force was the trajectory of COVID-19 and the impact vaccines might have. When we published the piece in early December, the world was on the cusp of starting a massive vaccination campaign, COVID-19 cases were very high and rising in many parts of the world, and new variants were concerning. Since then, the situation has improved markedly, and the news on the vaccine front has been positive. Here’s our take on where we are and where we might be heading.
1. The current pace of improvement around the world is remarkable.
Globally, the seven-day average of new COVID-19 cases is 39% below its prior peak on January 11, 2021. In Europe (-47%), the United Kingdom (-68%) and the United States (-54%), new cases are down substantially from their peaks, which for the United States was just three weeks ago. It took around two months for a similar drop from peak after the summer wave. A scan across all countries is similarly encouraging.
Further, in the United States, current hospitalizations are down 33% from peak levels, and the trend is that there are over 2,000 fewer patients hospitalized with COVID-19 every day. To illustrate how remarkable that is, if this pace continued, COVID-19 hospitalizations would be zero by the middle of March. Of course, that is probably too optimistic, but the situation is improving rapidly. Which begs the question…
2. Are vaccines already helping?
Short answer: It is probably too early to tell in the United States and the United Kingdom, even though there are some tentative signs (cases are falling more rapidly than would be expected among those over 80 in the United Kingdom, and cases and deaths are declining a bit more quickly in long-term care facilities in the United States). However, the most encouraging evidence so far comes from Israel, which is leading the global vaccination race at the moment.
The Israeli Ministry of Health has released data that suggests that of the almost 750,000 people over the age of 60 who were studied after their vaccine regimens, only 38 ended up hospitalized with COVID-19. Another study conducted by Maccabi Healthcare Services found that only 31 people (out of 163,000) who had been fully vaccinated became infected with COVID-19 in the first 10 days of protection. The vaccine trials showed both strong efficacy and, perhaps more importantly, that they drastically reduced the risk of severe illness or hospitalization, but the replication of those results in practice should make us all optimistic.
3. When could we start to see a real impact on new case growth?
Our colleagues in the Investment Bank recently published an interesting piece1 that sought to answer the question using Israel as an example. They note that vaccines have two potential benefits: the reduction in risk of infection and severe disease in the vaccinated person (direct benefit), and the potential reduction in transmission as the population of vulnerable people declines (indirect benefit). After making some assumptions around vaccine efficacy in reducing spread, the impact of social distancing, new variants, and some others, they find that in just two weeks the daily reduction in cases could be at -5.1% from -3.4% per day now: around 33% faster. In short: Keep watching Israel. If the number of cases falls substantially in the next several weeks, it could mean that vaccines are having a powerful impact on transmission.
The bottom line is that we are marginally more optimistic on the impact of vaccines now than we were in early December, especially for the United States and the United Kingdom.
The supply and access issues that hampered the early rollout in the United States should be alleviated as more doses are delivered. Vaccines are proving to be effective at not just preventing infection, but, more importantly, at preventing severe illness and hospitalization. The new strains are concerning, and a new strain that dodges the vaccines completely remains a key risk, but the early returns suggest that the jabs are effective at preventing severe illness caused by the variants that exist currently.
Indeed, financial markets are reflecting the optimism and differentiating between fast and slow vaccinators. The MSCI Israel stock index is up 17% over the last three months, and the British pound and the U.S. dollar have strengthened against the euro amid the slow rollout across the Eurozone. For now, we think it makes sense to stick with the positioning we have recommended: a tilt toward stocks relative to bonds, and a focus on individual companies and sectors that could benefit from pent-up demand and mobility in a vaccinated world. Oh, and you might not have to cancel your summer trip this year. Just keep your fingers crossed with us.
All market and economic data as of February 2021 and sourced from Bloomberg and FactSet unless otherwise stated.
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