The Vaccine Prize

Global equities did well this week, up by some 1%. However, this masks a large dispersion beneath the surface – European equities are up 7% while US equities are up just 1%. In fact, the tech-heavy NASDAQ is down on the week.

The driver has been the positive Pfizer/BioNTech COVID vaccine candidate news announced on Monday 9th November. This has been most beneficial for short duration stocks, i.e. those which are sensitive to the economy, and hence the major global equity indices have rallied or not depending on the weighting of such stocks.

Simultaneously, there has been a resurgence of COVID-19 cases in Western economies. However, statistical analysis by Goldman Sachs shows that economies are less susceptible today than at the height of the crisis back in March. Therefore, in the absence of mass government-mandated lockdowns – in particular in the United States – markets may look through the current resurgence.

Vaccine To Close The Gap?

The global economy is still some 6% below where it was at the beginning of the year. Assuming studies confirm the safety of the vaccine, a global roll out of the vaccine could help close this 6% gap. Should this happen, it would set the stage for two years of strong global growth.

Over the longer-term, there is good reason to remain optimistic on the US economy. Tim Duy, a professor at the University of Oregon, gives four such reasons* :

  1. There are no obvious financial bubbles;
  2. Household net worth is higher than the pre-pandemic peak due to a strong housing market and strong equity returns;
  3. Millennials are entering their prime home buying years and housing is affordable;
  4. Household savings have grown during the pandemic.

Unknown Unknowns

As always, investors will be monitoring potential headwinds closely, outside the inevitable “unknown unknowns”. These include possible virus mutations, lockdowns (should the virus not respond to current social distancing measures), and President Trump refusing to concede the election. However, there is good reason to be relatively optimistic over the longer term.


© 2019 GWM