For Markets, Vaccine Hope Is Better Than a Blue Wave
(Bloomberg Opinion) -- For weeks, U.S. financial markets had been pricing in the possibility of a large fiscal stimulus package to get the world's largest economy through the coronavirus pandemic. Those hopes were mostly dashed last week as it became clear that while Joe Biden would become the next president, Republicans would likely retain the majority in the Senate.
The only thing better in the eyes of investors, it turns out, is clear progress toward controlling Covid-19.
Futures on the S&P 500 Index soared to an all-time high and the benchmark 10-year Treasury yield jumped to as high as 0.93%, a level that hasn’t been seen since June except for the early hours of Election Night, after an announcement that the Covid-19 vaccine being developed by Pfizer Inc. and BioNTech SE prevented more than 90% of infections in a study of tens of thousands of volunteers. Bloomberg News described it as “the most encouraging scientific advance so far in the battle against the coronavirus.”
As always, results like this come with caveats. In this case, it isn’t known how well the shot works for the elderly or whether it prevents severe disease. But for traders, at the very least, it indicates another major step forward in vaccine development with a clearer potential timeline. If Moderna Inc.’s large-scale trial also succeeds in the same way, the U.S. could have two vaccines available by around year-end.
One way to digest this news is with the backdrop of the Federal Reserve’s meeting last week. For months, the central bank has kept the dour language in its statements the same: “The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.” At seemingly every opportunity, Chair Jerome Powell and his colleagues have pleaded for additional fiscal aid from Congress to get small businesses, local governments and unemployed Americans through this slowdown.
Powell often used to be asked about what a vaccine might mean for the Fed’s outlook, though not as much lately. A faster-than-expected Covid-19 vaccine isn’t just the next-best-thing to fiscal stimulus for the U.S. economy. Especially with a divided federal government likely in the cards, creating the potential for gridlock on Capitol Hill, a powerful vaccine is even better news. At the very least, this breakthrough from Pfizer and BioNTech might seem like a light at the end of a tunnel to those who are seeing coronavirus infections set sequential daily records across the country just as cold weather descends on wide swaths of America.
What’s more, there are clear signs the U.S. economy is already bouncing back without a vaccine. The nation added 638,000 jobs in October, beating expectations for a gain of 580,000, Labor Department data showed last Friday. The unemployment rate dropped to 6.9%, easily besting forecasts for a more modest decline to 7.6%, even as the labor force participation rate increased by more than estimated.
Put it all together, and you can see why traders might dare to be optimistic. For investors, it’s reasonable to start eyeing 1% 10-year Treasury yields again (though they need to break 0.955% first) and to begin testing the S&P 500’s all-time high from Sept. 2. Small-cap stocks and shares of travel companies are predictably soaring along with the price of oil, while gold is tumbling.
In other words, the “return to normal” trade is in full swing. Yes, there will probably be more fits and starts on the way to a widespread vaccine. But for one day, at least, markets can start to see life on the other side of the pandemic.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.
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