After months of waiting for progress in a Covid-19 vaccine, several vaccines have recently reported at least a 90% success rate. This makes an end to the current pandemic by the end of next year much more likely. Obviously, these announcements provide some much-needed hope as we head into year-end, but what impact have they had on the stock markets? And what do they mean for our Plans?
Stock markets have taken the news positively
After drug companies, Pfizer and BioNTech, announced the positive news regarding their vaccine trials, global markets surged. This announcement helped lift the FTSE 100 by 4.7% on November 9th - its biggest single-day gain since March 2020.
However, this news wasn’t the only cause for the market rise. Part may also be attributed to the split outcome of the US elections, where Congress is divided between the two main parties, Republicans and Democrats, meaning we’re less likely to see severe policy shifts. That said, Covid-19 has a far wider reaching economic impact, making it the key driver of business and consumer confidence alike.
But the vaccination news hasn’t impacted all sectors equally
The main winners have been the companies and industries that were seriously hit by the global pandemic, such as airlines and leisure. On the other hand, sectors that have benefitted from lockdown are seeing their value go down – for instance, Zoom, which saw its share price rise around 750% year to date at its October peak, thanks to the new ‘normal’, has seen its price decline 25% in the days since the vaccination news.
And markets were already on the rise
Not to downplay the impact of the vaccine announcements, but stock markets had already taken significant encouragement earlier in the year following massive central bank and government support. Also, as stock markets are long-term instruments, many investors were gaining more confidence as research showed a vaccine for Covid-19 could be expected in the next 6-18 months. The recent announcements from Pfizer, Moderna, and AstraZeneca, have stretched the mood even further into optimism. But the danger here is that expectations for a return to normal could still be high, and high expectations, as in life, make it easier for markets to disappoint.
Uncertainty is still present on stock markets
Although this news has made markets more optimistic, there’s still significant uncertainty about the outlook. We may be on track to get a successful vaccine for next year, however, right now the acceleration of cases across Europe and some US states have resulted in tighter restrictions and the return of nationwide lockdowns to slow infection rates. This means that there will likely be a negative economic impact in the near term, although it is expected to be much shorter and shallower as lockdowns have been more selective than those earlier in 2020, both by sector and geographically.
There’s also uncertainty on how policymakers plan to support the economy further. Central banks have cut rates to historic lows, and many have provided several further measures to try and boost spending and investment. Similarly, governments have provided a significant financial stimulus via furlough schemes for workers and loans to companies. While we expect policymakers to be very gentle in their reversal of these measures, market attention will be focused on how smoothly this is managed. The main priorities will be to limit the economic impact of raising interest rates towards more normal levels, tax changes, and/or reducing government spending to bring budgets closer to more sustainable levels.
The vaccine is still some way off
As several vaccines are reportedly effective, the end could be in sight, but we are definitely not there yet. The announced results are from phase III trials which means that further trials need to be conducted for the vaccine(s) to be approved. Also, it is important to note that these findings were published in news releases and not peer-reviewed journals, which makes them less definitive. Similarly, the spectrum of cases that the vaccine is effective for is also not yet clear. The main unknown, which will only become clearer with time, is the duration of effectiveness. Finally, the logistical coordination and conditions could introduce further challenges - Pfizer has reported its vaccines needs to be stored at very low temperatures with one version requiring conditions colder than Antarctica, at a -70c, while the other can be kept at -20c making it suitable for a home freezer.
Any vaccine will take time to comprehensively roll out globally, so the exact timing for when the world can return to normal remains very much up in the air. This remains the greatest and most important unknown which will dominate market movements in the months ahead.
If the vaccine can be rolled out quicker than expected, there is the potential for the global recovery to exceed current expectations. However, the range of global GDP (Gross Domestic Product) forecasts, which provides a snapshot of economic performance, remains understandably very wide given the spectrum of outcomes still possible. We are still some way from a complete recovery. Looking at global growth forecasts for 2021, the range is from 2.0% to 6.0% and averages at 5.2%. Compared to at the start of the year where the forecasts ranged from 1.2% to 3.7%, averaging at 3.2%.
The Wealthify investment approach
We remain cautiously positioned because we feel that much of the good news is already factored into markets, meaning there is already a high bar for a significant positive surprise, for example, news of a much swifter rollout of the Covid-19 vaccine. Although it remains uncertain to see how the global economy may evolve, we are taking the steps necessary to anticipate and prepare accordingly. We aim to protect our customers’ Plans from the potential swings and add value by taking advantage of the better days, as a result, we’re keeping a watchful eye on market data and news, and we are ready to act in your best interests to events as they unfold.
1: Data from Bloomberg
4: Data from Bloomberg
Please remember that past performance is not a reliable indicator of your future results.
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.