As Vaccinations Climb, Play the Long Game

Published by Anthony Di Pizio

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2021 - The Full Year Picture

Despite any short term market turbulence, there is a consensus for a higher S&P500 benchmark index by the end of 2021. At the moment JP Morgan holds a Street high target of 4,400 which represents a more than 15% gain from yesterday's close. What feels more important though is the minimum target of 3,800 held by both Citi and Bank of America - which is exactly where we are today. (Source: CNBC Market Strategist Survey)

Irrespective of all the uncertainty, it appears even the most pessimistic of the major banks on Wall Street expect stock prices to remain buoyant for the year. There is no doubt any shot we have at reaching some of the more lofty S&P500 targets will be predicated on a resolution to the COVID pandemic. 

As we watch vaccine programs roll out globally, we think there is cause for optimism that by mid-year, we'll be living under some semblance of normalcy. If this happens, we think JP Morgan's 4,400 prediction is not only achievable, but likely. 

Why? Well it would mean that we're living in a world of seemingly endless fiscal and monetary stimulus during a time when we could be as little as 5 months away from herd immunity in places like the US, where they'll soon be vaccinating up to 2 million people a day (currently 1.3 million per day). Therefore there is substantial room for an upside surprise to growth and earnings.  

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The Vaccine Story - Where We're At

Injecting entire countries with this shot will arguably be one of the biggest logistical triumphs in history at completion. That's because of the nature of some of the vaccines needing to be stored at temperatures well below freezing, requiring special equipment and in some cases bottlenecking distribution. 

Still, the US is putting in a mighty effort with the 7-day rolling average sitting at 1.3 million injections per day for a total of approximately 30 million people receiving at least one dose so far. 

This program kicked off mid-December with the FDA approval of the Pfizer jab, and so far the results speak for themselves in the chart below. Keep in mind, the US is still mid-winter which is supposedly the most dangerous time for COVID spread. 

We're now seeing daily cases similar to October/early November which were a third of the most recent peak. This has been a steep decline and appears to be the result of a combination of 30 million (first dose) vaccinations and 26 million previous infections. We could be seeing signs of a genuine win against this virus in the US in a matter of months if the trend continues.

We expect the introduction of the more logistics-friendly Johnson & Johnson vaccine soon, which can be stored at refrigerator temperatures for months. It is also a single dose shot and they plan to supply the US with 100 million doses in the first half of this year (Reuters). That's enough to service almost a third of the entire US population with just one vaccine - keep in mind there are two others presently doing the rounds.

Look to Israel

A little known fact - it's Israel currently leading the world in vaccinations by percentage of population. Over 50% of their residents have received a shot and their COVID case numbers have definitely rolled over. They will be the country to watch as we approach June, where mathematically speaking they'll almost certainly have achieved herd immunity. 

Watch For Stimulus

The US government is currently back and forth negotiating a possible US$1.9 trillion stimulus deal. It would include a few key measures like:

- One-off $1,400 stimulus payments to individuals

- Extending the $400 uplift to unemployment benefits

- Rental and landlord support

- Expanding tax credits for individuals

- State and local government support

This is an enormous package if passed as the Democrats have designed it. Combined with progress towards COVID herd immunity, investors undoubtedly have some key tailwinds at their backs especially in the second half of this year where much of the growth would be unlocked. 

As mentioned, this leaves the door open for an upside surprise towards year end. We think as long as there are no new negative shocks, we could see a powerful rally in the S&P500 which surpasses even the most bullish Street targets.