Vaccine: That Pinhead of Light at Tunnel’s End

Pfizer’s vaccine announcement gave the equity market the vision and hope that some semblance of “normal” was closer than previously assumed; perhaps a light at the end of the tunnel.

Reality is that, due both to the complex logistics of handling the Pfizer vaccine, the two shot inoculation process, and the voluntary system in America, that light at tunnel’s end is just a pinhead, with a long and treacherous journey ahead.  Headlines bear this out.

To complicate matters, the resurgence of the virus to record levels of infections and hospitalizations in the cooler weather has rekindled thoughts of renewed business lockdowns.  Hoarding has, once again, begun.

Hope and Euphoria

On Monday, November 9^th, the investing world changed (at least temporarily) with Pfizer’s announcement that they had developed a vaccine with a 90% efficacy rate in their Stage 3 trials.  The Dow Jones rose nearly 3% on the day.  The other tech heavy indexes didn’t fare as well (Nasdaq -1.5%; S&P500 +1.2%) as the view that “normal” would return sooner than expected took the luster off the “stay at home” and “new economy (tech)” stocks, and lit a fire under some of those beaten down old economy stalwarts.  (Remember, the market always shoots first and asks questions later!)  No doubt, Pfizer’s announcement is good news.  Indeed, if the vaccine timetable (end of Q1) proves to be real, then maybe all the economy needs is one more stimulus package.

Vaccine Reality

• The same day Pfizer announced its Stage 3 results, Bloomberg ran a story on the vaccine entitled “Deep-Freeze Hurdle Makes Pfizer’s Vaccine One for the Rich.”  The Pfizer vaccine must be kept at -70 degrees C (-94 F). (I also saw -80 C (-112 F) in another article) and has a shelf life of five days after thawing (in the alternate article, the viable life was two to five days).  China has ordered massive doses from Pfizer and is now in preparation to inoculate its citizenry.  Think of the competition for the limited production capacity that currently exists and see if you can logically conclude that we will have enough vaccine by Q1 (never mind the temperature logistics).  The Bloomberg article explains that in China, this involves “a complex and costly system of deep-freeze airport warehouses, refrigerated vehicles…”  In addition, “the herculean journey from warehouse freezer to rolled-up sleeve must be undertaken all over again – to deliver the second booster shot a month later.”
• Possible in China? – yes, as inoculation will likely be mandated.  But, unlikely in the U.S. where vaccination is voluntary.  The cost would be prohibitive, too, although I am told by my Gen Z grandson that innovation in the U.S. (i.e., Amazon) will figure out a way to do same or next day delivery at an affordable price.  That certainly could be a game-changer.
• Newsweek reported that, in the latest survey conducted by Morning Consult (October 10), only 48% of Americans said they would take the vaccine.  Since this is a two shot series, it is likely that a significant percentage of those who get the first shot would fail to get the second, thus lowering that already low percentage.
• This throws a monkey wrench into the market’s initial exuberance.  Perhaps we can actually vaccinate America with the Pfizer solution, but, if we can, it is doubtful it will be done in Q1 and Q2 of 2021.  At present, that light at the end of the tunnel appears to be a pinhead.

Other Reasons for Market Exuberance

Sector price movements (value vs. growth) on the Monday of the Pfizer announcement tell us that most of the market reaction was, indeed linked to the view that “normal” would return sooner than anticipated.  Nevertheless, there are other reasons for markets to exhale.  If Republicans hold onto their Senate majority (currently 50 Republicans to 48 Democrats with two runoff elections in Georgia (republicans favored)), then, with divided government, the following are almost assured:

• No new tariffs;
• No significant new taxes;
• No Green New Deal;
• No ban on fracking;
• No Fed rate hikes on the horizon.

In addition, federal deficits are gong to rise, and besides at least one more Covid-19 stimulus package (i.e., helicopter money), there are going to be initiatives for upgrading the country’s crumbling infrastructure.

This all looks to be market positive, especially if markets are discounting results for 2022 or 2023.  But, if markets are really looking for a return to “normal” by Q1/Q2 2021, there will be disappointment.  What I have been writing about in these blogs since April is that getting from where we are back to “normal” is no easy feat.  The vaccine gives us hope.  But the light at the end of the tunnel is still just a pinhead.

Prominent Economists & The Headlines

I am not the only economist with this view.  We have seen Fed Chair Powell plead with Congress to authorize a second stimulus package.  That was before the “vaccine,” you say!  Well, on Wednesday, November 11^th, in a meeting with ECB President Lagarde and a Bank of England Governor (Bailey), Powell said: “…even with the news of a prospective vaccine, the Fed and Congress need to do more…”

Here is what Fed Governor Lael Brainard had to say in an October 21^st speech: “The most significant downside risk to my outlook would be the failure of additional fiscal support to materialize…recessionary dynamics to become entrenched, holding back employment and spending, increasing scarring from extended unemployment spells, leading more businesses to shutter, and ultimately harming productive capacity.”

And, here are some additional recent Wall Street Journal (WSJ) headlines:

• “More Mall Owners Choose Bankruptcy, Closings,” 11/11/20, B6;
• “Companies Seek to Rent Extra Space,” 11/11/20, B6.  According to the article, companies are “flooding the market with additional supply that could depress U.S. office rents.”  In addition, the CoStar Group found a “record 42 million square feet of space on the market in the second and third quarters.”
• “State Aid to European Banks Obscures Level of Bad Loans,” 11/12/20, A1.  The article states: “…regulators and bank executives are concerned about a potential wave of bad loans that could overwhelm lenders when government rescue packages end.”
• The virus is having a field day as cooler weather settles in.  The main headline on page A1 (front page) of Friday’s WSJ (11/13/20) read: “States Order New Restrictions As Covid-19 Soars Nationwide.”  As citizens anticipate another set of complete or partial lockdowns, hoarding has once again begun (TP and paper towels for starters).  Hospitalizations, too, are on the rise with concerns, similar to those in April, regarding ICU capacities.  Given current reality, until the time the vaccine is distributed and becomes effective, the virus is going to act as a significant constraint on economic activity.

Employment

As I have stated over and over in this blog, employment is the key to the economy.  And, until it shows healing, the economy will stay intrinsically depressed. 

• State and local governments employ 19+ million people.  In October, -130K jobs were lost in this sector, on top of -187K in September, and -1.3 million since the pandemic emerged.  Without additional federal support, unlikely in the current political environment, we can expect continued layoffs in this sector.  Not good news.
• The weekly state Initial Claims (IC) data (+744K) show little signs of abatement, and when the ICs from the Pandemic Unemployment Assistance (PUA) Program are added in, we see that we continue to be stuck at over +1 million new layoffs per week; this, eight months into the Recession that won’t end.
• Continuing Claims (CCs), too, appear to be falling.  But this is clearly more a function of exhausted eligibility than a sign of re-employment.

• A new business shutdown, apparently being discussed by Mr. Biden and his advisers (“Biden’s Lockdown Lobby” WSJ, 11/13/20, A14) would certainly exacerbate the unemployment issue.  If that were to occur, we could expect ICs and total unemployment to retest their spring peaks (6.2 million and 32.4 million respectively). 

Conclusion

The fact that there appears to be a viable vaccine is hopeful.  Equity markets exhibited that hope last week.  But, the logistics of the Pfizer vaccine along with American skepticism regarding inoculation, damage already done to the economy, and the resurgence of the virus, likely makes herd immunity a non-event in the near- intermediate-term.  To further complicate the economics, the resurgence of the virus has put America on notice that more business shutdowns are a possibility on the near-term horizon. 

Robert Barone, Ph.D.

November 16, 2020

Robert Barone, Ph.D. is a Georgetown educated economist. He is a financial advisor at Four Star Wealth Advisors. www.fourstarwealth.com. He is nationally known for his writings and Robert’s storied career includes his having served as a Professor of Finance, a community bank CEO, and a Director and Chairman of the Federal Home Loan Bank of San Francisco. Robert is currently a Director of CSAA Insurance Company (the AAA brand) where he chairs the Finance and Investment Committee. Robert is the co-portfolio manager of the UVA Unconstrained Medium-Term Fixed Income ETF (FFIU).