The S&P 500 hit a 4-week high on Friday, continuing to grind higher in the face of rising cases of Covid-19. We have previously said that the path of the virus was critical to the path of the stock market, and the data clearly showed the relationship. Back in February and March as new cases rose stocks fell, and as Covid cases began to plateau in April stocks began their recovery, demonstrating strong negative correlation. More recently however, Covid cases have begun to rise and the market has hardly reacted. Covid cases are up. Here is why the market does not care.
Better treatment options
In just the past few months, the medical community has made tremendous strides in treatment of Covid-19, resulting in much better outcomes and fewer deaths despite the rise in new cases. This week the market reacted positively to Gilead Sciences clinical trial of Remdesivir, an antiviral medication that has shown to significantly improve clinical recovery and the risk of death in Covid-19 patients. Other antivirals have also shown promise, including Kaltera, an HIV medication that in one study reduced Covid-19 recovery time from 12 to 7 days. Similarly, Dexamethasone, a simple, widely available steroid, has shown great promise, reducing deaths in one study by one third among patients on ventilators and by one fifth among those receiving oxygen therapy alone.
Vaccines
Longer-term there are more than 100 vaccines being developed around the world to treat Covid-19. It is truly a global race to find a cure and several are showing promise. Moderna appears to be in the lead in the U.S and is currently in Phase 2 testing, expecting to enter Phase 3 in July. Early positive results indicated that those receiving the vaccine had antibody levels equal to or greater than patients who had recovered from Covid. Pfizer’s vaccine is also showing promise. The massive drug company is planning to manufacture 100 million doses by the end of the year and more than 1.2 billion doses by the end of 2021. Other companies in the race for a vaccine include Johnson & Johnson and AstraZeneca which are also on track to have vaccines available soon but likely not before year end.
Improving forecasts
During February and March, companies slashed their revenue and earnings forecasts for 2020 and many withdrew any guidance for 2020, basically admitting that they could not forecast the future of their business due to the impact of the virus. Industry analysts followed suit, reducing their estimates for 2020 earnings. All indications predict that second quarter earnings, due to be released over the next couple of weeks, will be one for the record books – in a bad way.
However, amid the terrible news the sun is shining through the clouds as economic indicators continue to show improvement. For example, gasoline usage, an important indicator of economic activity, plunged 43% during the month of March, but has risen 60% from the bottom and is now only 14% below pre-virus levels. Similarly, the Citigroup economic surprise index, which measures whether key economic indicators are coming in above or below expectations, soared to a record on Tuesday July 7th. Analysts have stopped slashing earnings expectations and are beginning to increase them as the economy shows signs of life.
The path forward
Clearly the virus remains a risk to the economy and the market, but the future is certainly hopeful. Real scientific progress is being made in combating the disease, reducing the risk of additional shutdowns. As a result, the economic risks of the virus are diminishing even as the number of cases are increasing. Investors are normalizing earnings and looking past the current economic data to a brighter future.