A Dose of Reality: Vaccines, Variants & Equities

January 29, 2021—Over the course of the past week, equity market volatility has spiked based on several concerns, including:

• Budding asset bubbles in select pockets of the market, particularly lower-quality stocks subject to elevated short interest
• Delayed or diminished government stimulus
• Possible lower COVID-19 vaccine effectiveness against new virus variants

In today’s blog post, we focus primarily on the third topic as two major vaccine development programs provided positive updates over the past 24 hours. However, we would also like to briefly address the first topic relative to abnormal market activity in certain stocks, most notably GameStop (GME). The extreme gains seen in GME and numerous other lower-quality stocks is both counterintuitive and unsettling. While this unease does account in large part for the selloff we have experienced over the past several sessions, we believe that these phenomena are isolated and should resolve themselves without posing a serious risk to the stability of the broader markets. It is difficult to say how long this process will take to play out, but there is fundamentally little reason to expect the affected securities’ mispricings to spill over to the broad market. 

Returning to the state of COVID-19 vaccines, yesterday evening Novavax (NVAX) announced top-line Phase 3 data from its COVID-19 vaccine trial that demonstrated an overall 89.3% efficacy. The vaccine was shown to be 95.6% effective against the UK variant with 60% efficacy against the South African variant. Although the overall efficacy levels were lower against the South African strain of the virus, most cases were mild to moderate with no severe cases occurring in the trial’s vaccine arm .

This morning, Johnson & Johnson (JNJ) reported a top-line global efficacy of 66% from its single-dose COVID vaccine trial. While on the surface this numerical result appears disappointing, we think the underlying elements remain positive. The vaccine is 57% effective in preventing disease against the South African variant after a single dose (similar to NVAX results after a two-dose treatment) and more importantly, there was no increase in the number of moderate or severe cases to this variant of the virus. Additionally, 28 days after vaccination, which is a key measure in determining vaccination effectiveness, there were zero instances of hospitalization or death across all virus variants.

JNJ is planning to file for emergency-use authorization in the coming weeks and we expect the company to receive this approval in mid to late February. The approval should dramatically increase the availability of vaccines across the country as JNJ will have product ready to ship upon approval and reiterated its commitment to deliver 100 million doses (single-dose vaccine = 100 million fully vaccinated individuals) by the end of June. Although NVAX signed an agreement with the U.S. government as part of operation warp speed, the company is not expected to begin shipping doses here until later this year. 

Figure 1: Vaccinations offer hope for return to “normal”

Sources: Financial Times, New York Times, STAT News. Data as of January 29, 2021.

Figure 2: The race to herd immunity

Data as of January 29, 2021. Source: The COVID Tracking Project.

Core narrative

Today’s vaccine updates coupled with the news earlier in the week that the U.S government is working to secure additional vaccine doses to be delivered through the summer support our view that the domestic economy remains on track for the return-to-“normal” timeline. Notwithstanding the recent market correction and volatility, we have turned more constructive on equities as the outlook for vaccines, fiscal stimulus, and monetary policy are all creating a positive backdrop for risk assets over a 9- to 12-month investment horizon. We have the highest conviction in U.S. small-cap and emerging markets equities. Short-term risks remain, and volatility is picking up, but we expect equities to outperform over a one-year timeframe. 

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