If Closing In On Coronavirus ‘Herd Immunity’, Markets Are Mispriced
There is a big dichotomy in the market these days and it’s been a headline since Covid became a thing.
It’s tech stocks versus every other stock. A few vaccine makers can be counted on to rescue the S&P 500 on a down day.
But if we are approaching herd immunity — which generally requires at least 65% of a population to have been infected by a virus — then some investors are finding the place to be is in the most hated, beat up names around. The Six Flags’ of the U.S. The Cheesecake Factories. And abroad, Brazil, the second hardest hit by the pandemic in the Americas after the U.S.
“In an environment where the economy is going to recovery from a deteriorating pandemic, then I want the stuff that’s 60% off their highs,” says Brian McCarthy, chief strategist for Macrolens, a big picture investment research firm out of Stanford, Connecticut. “Tech stocks and biotech stocks are too expensive. The vaccines might not even succeed and — who knows — we may not even need one, and if we do, will they be mandatory? We don’t know. But I want to be buying the stuff that is underperforming here and abroad,” he says, naming Brazil.
Tech firms have done well because they are long term stories and — for now — they can borrow money long term at next to nothing interest. Wall Street knows it, and so investors have become Tesla TSLA hoarders, of sorts. Gilead Sciences GILD and CanSino Biologics have done well because they are in the pole position on a Covid-19 vaccine. In the last trading week, those stocks have fallen down to Earth and are no longer the momentum plays they once were for short term investors and retail day traders.
Follow The Herd?
Several studies have shown that people infected with Covid-19 tend to have these things called T-cells that can target the virus, even if they had no major symptoms. Scientists have reportedly learned that some people can test negative for coronavirus antibodies in blood tests but test positive for T-cells that can identify the virus and fight it back. This has led to suspicions that some level of immunity against the disease might be twice as common as was previously thought, according to a long BBC feature on the subject last week.
When researchers tested blood samples taken years before the pandemic started, they also found T-cells which were specifically tailored to detect the proteins found in Covid-19. This could mean that people had a pre-existing degree of resistance to the virus anyway. Some 40-60% of unexposed individuals had these cells, the BBC reported.
The issue of herd immunity is of primary concern to markets, as investors want to get the show on the road and move on.
Worth noting, the first SARS came and went in 8 months, starting in November 2002 and pretty much disappearing from headlines and public concern by July 2003 with no lockdowns and only face mask usage.
This latest version spreads much easier, but if we are lucky, and the 8-month comparison holds out, then the U.S. would see light at the end of the tunnel by October assuming community transmission of the disease began in February.
For policy makers, it is taken as an article of faith that a vaccine for Covid-19 is inevitable. Many states are waiting for it in order to fully allow for the opening of businesses, such as bars at restaurants.
No one has a firm grip on the coronavirus, with some virologists arguing that you can catch it, and then catch it again. Will the vaccine be like the kind of vaccines that stop polio and the measles, or will it be more like the kind that tries to stop the flu, but doesn’t always do the job? Depends on the drug maker. We will all know the answer one of these days.
For now, the $50 billion gain in market cap for five well-known biotech firms is overblown, even under the assumption that a Covid vaccine becomes mandatory.
The “life will never be the same” crowd is effectively shorting the efficacy of 200,000 years of human evolution, says McCarthy. “I’ll take the other side of that bet.”
As the markets relax from their sugar highs, gold is rising, the dollar is weakening, and all of this bodes well for emerging markets that have not kept pace with the developed world despite historically low rates there as well.
Russia cut its benchmark rate to 4.25% on Friday.
Brazil’s benchmark interest rates has been cut by over 1000 basis points since the start of the pandemic. The market has been hyper focused on tech and drug makers in the U.S. and China. The trend is changing, but that trend doesn’t seem to have a long shelf life.
“We are still stuck in a time of uncertainty even if markets wish that we weren’t,” says Julia Hermann, senior global strategy analyst at Cartica Management. “It’s hard to argue for a broad-based rally in anything, let alone emerging markets. We still don’t know a lot about this virus, and economic data has been mixed or heavily contradictory,” she says. “A lot is still dependent on policy support.”