NEW YORK (Reuters) – Optimism that vaccines are on track to end the coronavirus pandemic has been a major factor in the resurgence of U.S. stocks this year. It will face a critical test in the coming weeks, as investors wait for clinical data to find out if they actually work.
An UBS analysis found that around 40% of the market’s gains since May can be linked to hopes of vaccines against COVID-19, which has killed more than 960,000 globally and rocked the global economy.
Global efforts to develop a vaccine are coming to a head, with late stage data from trials conducted by companies such as Pfizer Inc
and Moderna Inc.
possible from October or November. Disappointing results could further shake up markets which have recently become turbulent amid concerns over delayed fiscal stimulus and uncertainty surrounding the November 3 presidential election.
“We expect this stuff to work,” said Walter Todd, chief investment officer at Greenwood Capital in South Carolina. “Any news to the contrary could therefore represent a risk for the market.”
The number of vaccines under development could mitigate the negative impact on the market with just one setback. More than half a dozen vaccines around the world are in late testing out of more than 30 currently being tested in humans, according to the World Health Organization.
“We are preparing for success in the sense that if you throw enough spaghetti on the wall, hopefully at least a noodle stick,” said Liz Young, director of market strategy at BNY Mellon Investment Management.
This could explain why stocks on the whole barely reacted at the start of the month, when AstraZeneca Plc
and its partner Oxford University have suspended global trials of one of the main vaccine candidates after a participant in its UK trial fell seriously ill. Trials have resumed in Britain, Brazil and South Africa, but remain pending in the United States.
Some forecasts on vaccine availability have become less optimistic. Good Judgment, a company whose forecasters make predictions based on publicly available evidence, estimates that a vaccine will be widely distributed in the United States by the end of March at 54%. That’s an increase from an estimate of less than 20% in early July, but from over 70% earlier this month.
Pfizer and Moderna could report the first efficacy results in October or November based on an early read of the data, followed by data from companies such as AstraZeneca, Johnson & Johnson
et Novavax Inc
An emergency use approval or authorization this year could lead to an increase in travel, leisure and other stocks that have been depleted by the pandemic-related closures, while also fueling a long-awaited transition to actions by value of technology and other growth names that have led the market for years.
Even if a vaccine is approved, questions persist about the ease and speed of its distribution. President Trump and his health officials have released conflicting predictions about when the general public might have access to it.
“The potential for market disappointment will likely come from the realization that large-scale manufacturing and distribution will take longer,” said Art Hogan, chief market strategist at National Securities.
An approved, widely disseminated and accepted vaccine could translate into a gain of around 300 points against the S&P 500, or more than 8% at the current level of the index, according to Keith Parker, head of US and global equity strategy at UBS.
If a vaccine is widely distributed in the first quarter, BofA Global Research projects global gross domestic product (GDP) growth of 6.3% in 2021, compared to 5.6% if this does not occur until the third quarter.
The disappointing news from clinical trials could cause a loss of 100 points to the S&P 500, or about 3%, Parker estimates.
While the market may be able to handle a vaccine setback “reasonably well”, several setbacks could lead to a reconsideration of the vaccine race, he said.