Since May 2020, the analysts from Swiss bank UBS have noticed an investor optimism over the development of a COVID-19 vaccine that has added about 6.5 percentage points to the returns of the S&P 500.
The S&P 500 index broke some new highs last week, after dropping nearly 34% earlier between February 19 and March 23 due to the global COVID-19 outbreak.
Based on a number of economic models, the UBS researchers concluded that investors have priced the arrival of a vaccine with a probability of between 33% and 40%.
Optimism Reigns in August
The stock market’s strong recovery since the crash in February and March may not have been possible without vaccine optimism. The market will continue to respond strongly to any news about vaccine development in the coming weeks and months.
UBS did point out that the prices of companies most likely benefit from a successful vaccine, such as the severely battered hospitality and leisure stocks, have barely surpassed the S&P 500 since May. That would suggest that the arrival of a vaccine has not yet been priced in all sectors.
Several companies are working on a vaccine, including pharmaceutical giant Johnson & Johnson ($JNJ), which according to the Wall Street Journal, is about to test its vaccine on approximately 60,000 people worldwide. That’s one of the most comprehensive clinical trials known today – twice the size of other potential vaccine studies from Moderna ($MRNA), Novavax ($NVAX) and AstraZeneca ($AZN).
The Benefit of Small-caps and Mid-caps
UBS analyzed the behavior of the market on trading days with important vaccine news. Small-caps and mid-caps are expected to benefit the most from a vaccine breakthrough.
On days that good news is released, small company stocks outperform large companies by about 2 percentage points, according to the analysis of UBS. Given investor optimism about the advent of a vaccine, UBS predicts that small stocks – if a well-functioning vaccine is found – may outperform stocks with a large market capitalization by about 13 percentage points. These are companies like iBio Inc. ($IBIO) and Vaxart ($VXRT).
Cyclical Companies are More Sensitive
Value stocks aren’t doing much better than growth stocks, UBS said, but on days of big vaccine news, cyclical stocks – which are more sensitive to the economic cycle – have far outpaced defensive stocks.
The Swiss investment bank concludes that cyclical stocks may outperform defensive stocks by 10 percentage points once a vaccine is fully priced.
Optimist Versus Realist
Economists warn that optimism about a vaccine shields the stock markets from real problems such as the inability of politicians to agree on support measures. Concerns about the economical damage from the pandemic may make all the enthusiasm about possible vaccines premature.
Long-term optimism about a vaccine is secondary to short-term concerns about the economy and healthcare: an employment deficit of 13 million compared to the period before COVID-19, states with budget deficits, and more than 50,000 infections every day.
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