A survey of life science executives conducted by investment bank Stifel Financial shows that the vast majority of such executives do not see a coronavirus vaccine becoming available for more than a year, while a slimmer majority see a severe second infection wave.
Of the several current risks to the U.S. stock market, two of the biggest are the timeline for a vaccine and a second wave of infections. Stocks have rebounded sharply -- although not to pre-virus levels -- as state reopenings, monetary and fiscal stimulus, hopes for a vaccine and a bottoming in economic data are all in the books already. The S&P 500, still 7% below its all-time-high, is 40% above it March 23 bear market low, a rally partially driven by growth tech stocks that can power through headwinds, but also with strong participation from cyclical value stocks tightly correlated to changes in the economy and reopenings.
But as some more bearish on Wall Street point out, health risk is the most important factor for investors to monitor. Economic and financial statistics are important for a macro view of what to expect in the broader market, but if virus infections come back with vengeance or if vaccines cannot be produced quickly, the stock market, seemingly priced for perfection just a few weeks ago, is vulnerable.
First off, virus cases have already spiked again. The 5-day moving average in daily new virus cases in the U.S. hit 31,000 Tuesday, up from 17,000 almost a month ago, according to data from Johns Hopkins. Excluding this past weekend, the last time the 5-day moving average was above 30,000 was at the end of April. A sustained bounce in cases has occurred for most of June as states have reopened.
Trading has been choppy in June, with the S&P 500 down 1.4% in the past 19 days, a stretch that did include a substantial sell-off. The 10-Year Treasury yield is down 19 basis points since the beginning of the month. The Vanguard S&P 500 Value etf (VOOV) - Get Vanguard S&P 500 Value ETF Report, home to many cyclical stocks, is flat for the entire month, taking a back seat to growth, a slightly risk-off signal.
Still, some strategists have noted, consistent with market behavior, that investors were initially highly fearful of an uptick in virus cases but are now desensitized enough that they’re now mostly afraid of more lockdowns, which have yet to become a theme. More harsh selling may have to wait for more lockdowns, although the market does have a baseline level of confidence because of ongoing Federal Reserve stimulus. Political will in Congress for more fiscal stimulus is currently front-and-center for investors.
Stifel’s results showed that 98% of participants think a vaccine will be available to all Americans, but that 76% of participants think a vaccine will not be widely available until at least late 2021.
While 98% of respondents believe there will be a second wave -- it’s unclear if the recent trends are considered a second wave -- 52% think the second will be "severe enough to cause more government-imposed closures and restrictions,” Stifel wrote in its release of its findings. Even if the recent case surge is considered such a wave, some medical experts think the colder months of 2020 may cause another meaningful round of infections.
But on a bullish note, investors have been highly responsive to any indication that there will soon be a vaccine, which supports stocks. Investors are financial experts, not medical ones and they are encouraged enough by positive press releases from biotech companies like Moderna (MRNA) - Get Moderna, Inc. Report or Gilead Sciences (GILD) - Get Gilead Sciences, Inc. (GILD) Report to nibble at stocks.
So where are stocks priced?
The average stock on the S&P 500 is trading at just above 22 times the next 12 month’s earnings per share estimates, leaving an earnings yield 3.7% in excess of the yield on the safe 10-Year Treasury bond. That risk premium was at 3.4% earlier in the month, before earnings estimates caught up to stock prices a bit. Historically, the equity risk premium on the S&P 500 sits at around 3.5%, so while stocks are not priced cheaply, they are also not priced expensively. The stock market is no longer priced for perfection by historical standards, but earnings estimates, and to some extend earnings multiples, are vulnerable to coming down if the virus and vaccine developments do not materialize in accordance with market expectations.
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