September 2021 - The stock market is currently sitting at an all-time high even though the world is seeing a resurgence in COVID cases and hospitalizations. The best explanations for this dynamic appear to be that investors have become accustomed to life with COVID and it is looking increasingly likely that we will have to live with this disease for some time. Investors may also be looking past the current surge as the Delta variant could soon subside in the U.S. if it follows the same pattern as India. Moreover, corporate earnings should ultimately be what drives stock prices and earnings results thus far have been mostly strong.
While COVID continues to confound experts and conditions are changing rapidly, several themes are emerging, namely that vaccines are effective at preventing severe illness but appear limited in their ability to prevent transmission (according to the CDC), masks provide some protection but aren’t likely to fully mitigate virus spread, boosters or additional shots for variants will likely be needed periodically, and there appears to be a renewed emphasis on therapies to treat patients.
With cases spiking in highly vaccinated states and countries, it begs the question of whether the vaccine is less effective against the Delta variant, or whether the vaccine’s effectiveness wanes over time. The answer is likely both. According to a recent study of UCSD healthcare workers in the New England Journal of Medicine, vaccines were 93.9% effective immediately after vaccination in March 2021 but effectiveness declined to 65.5% by July 2021 as Delta became the dominant strain. Although there was a decline in efficacy, the vaccines still appear to be effective against the Delta variant and lessen the likelihood of hospitalization and death. In addition, the CDC has recently stated that the vaccines are good at preventing death but not as good as originally thought at preventing transmission. This reinforces our view that COVID will be around for a while.
The CDC is currently evaluating whether a 3rd shot of the mRNA vaccines should be recommended and at what interval. We expect news on this very soon and we wouldn’t be surprised to see a 3rd shot recommendation given that they do boost antibodies and there is already precedent for this with other common vaccines that require three shots for full effectiveness (hepatitis B and HPV). The original dosing schedule might also be altered as there is some data that the 3-4 weeks spacing between shots is too close for maximum effectiveness, and we could see a change to 3-4 months. In addition, new versions of the vaccine will likely be needed as the virus mutates, like the flu shot, and Pfizer has stated that it can develop a new vaccine in as little as 90 days.
Unfortunately, it is increasingly evident that masks may not be a “silver bullet” to prevent infections. While mannequin studies have shown that masks provide some protection (more for KN95, less for cloth), the fact remains that the virus is smaller than mask fabric and states/countries with high mask compliance are still having case spikes. While the jury is still out on the effectiveness, it is increasingly likely that simply masking up won’t fully solve the problem. Nevertheless, we expect masking to remain for some time as companies, especially those that are customer facing (restaurants and retail), require their employees and patrons to wear masks as an added precaution.
Early in the course of the pandemic, the focus was on developing vaccines. Now that vaccines have been launched and the vaccination rate continues to climb, albeit slowly, there appears to be a renewed focus on treatments. Initially, Remdesivir was the only “authorized” treatment, however, monoclonal antibodies from Regeneron have recently been launched and are increasingly being used to prevent hospitalizations. Several pharmaceutical firms are also developing antiviral treatments, that if successful, could add to the arsenal of treatments.
With all of the news on COVID cases spiking, many may ask how the market can be at an all-time high. Historically, initial shocks to the system have resulted in sharp stock market declines, such as when the first missiles are fired in a war. However, each iteration of the same shock tends to have less and less of an impact on the market and we are seeing this now with the Delta variant. We also believe that investors may be looking at the virus trajectory in India (where Delta emerged), which saw cases spike rapidly and then fall within a short period of time. Extrapolating this to the U.S. would mean cases could start to fall soon. The rising vaccination rates, along with the new focus on treatments, are making investors more comfortable that COVID will be manageable and thus the economy won’t shut down as it did in 2020. The expectation is that while there may be fits and starts, a return to normalcy is more likely.
While there are still areas of the economy that haven’t fully recovered, namely travel exposed companies, many sectors of the market have shown considerable improvement over last year and the outlook is for continued recovery. Corporate earnings in Q2 have generally come in ahead of expectations and CEOs appear very bullish on their companies’ prospects.
In summary, there are a lot of reasons to be positive on the market, we have vaccines that are preventing hospitalizations and deaths, additional treatments are in the pipeline, and earnings growth appears solid. Unless the COVID situation takes a significant turn downward or a different issue arises, we believe the market will likely continue to rally.
Chris Sessing, Chief Investment Officer