CNN Business/Julia Horowitz
Vaccine progress is trumping bad economic news
Investors have made up their minds: For the time being, vaccine euphoria is outweighing bad economic news triggered by coronavirus restrictions.
What’s happening: Drugmaker AstraZeneca announced Monday that its experimental Covid-19 vaccine is highly effective in large scale trials — the latest of several vaccine trials to post promising results this month.
US stocks rose in early trading, with the S&P 500 last up 0.5%. Last week, both the S&P 500 and Dow registered modest losses, while the Nasdaq Composite rose slightly.
But markets will have to sort through two competing impulses in the coming months. Monday’s gains come despite a harrowing outlook for coronavirus cases and new data that shows related restrictions are taking a toll on the economy.
In Europe, which has enacted strict lockdown measures in recent weeks, the composite Purchasing Managers Index from IHS Markit — a closely-watched gauge of the manufacturing and services sectors —has hit a six-month low.
Declines, which in October were isolated to the services sector, are now also affecting industrial output.
“The eurozone economy has plunged back into a severe decline in November amid renewed efforts to quash the rising tide of Covid-19 infections,” said Chris Williamson, chief business economist at IHS Markit. “The data add to the likelihood that the euro area will see GDP contract again in the fourth quarter.”
While the November contractions aren’t as severe as those seen this spring — in part because economic output hadn’t fully recovered from the last plunge — they could still prove damaging.
It’s a warning to the United States, where policymakers are grappling with how to handle soaring cases and record hospitalizations from the virus. At least 83,870 Covid-19 patients were hospitalized Sunday — the 13th straight day the US has broken its record, according to the Covid Tracking Project.
JPMorgan’s chief economist Bruce Kasman said these shifts will inevitably hit global growth, slowing the overall recovery.
“With the US and Europe now projected to contract and with the pandemic worsening, the rest of the world is likely to buckle,” Kasman told clients Friday.
Goldman Sachs downgrades GDP estimates for Q4 and beyond thanks to COVID case surge
Goldman Sachs is serving up some harsh projections just days before Thanksgiving.
The bank cited “the rapid and broad-based resurgence of the coronavirus” as the main reason it was downgrading Q4 and Q1 GDP forecasts. Goldman now expects +3.5% and +1.0% annualized growth in Q4 and Q1 (+4.5% and +3.5% previously).
Indeed, the worry is that as too many travelers in the U.S. ignore Thanksgiving COVID recommendations from the CDC and keep plans to mix and mingle with extended family, we’ll see cases continue to rise from their already staggeringly high levels. Then that will lead governments to reinstate regulations that curtail economic activity.
The resulting crackdowns may vary geographically, however. “We expect the largest hit in the Northeast, where lower temperatures will likely mean a larger virus headwind and where policymakers have indicated more willingness to impose restrictions, and the smallest hit in the South. We expect sequential declines in consumer services spending over November through January, and now see -1.0% annualized real consumption growth in Q1,” the analysts wrote.
Meanwhile, the outcome of any stimulus deal now seems to hang on the two Senate races that are heading to a runoff in Georgia. Should the Democrats capture both seats, and thus control the chamber thanks to the tie-breaking vote of Vice-President elect Kamala Harris, most economists see a big package, including another round of $1,200 direct payments. But if Republicans retain control they have long been partial to a much “skinnier” package which is not likely to include checks for individuals.
Goldman’s analysts had earlier cautioned that failure to reach a “fiscal agreement by the end of Q1 or widespread and more stringent virus restrictions could lead to outright contraction in Q1.”
Selloffs in gold are ‘misguided’: Focus shifts to Fed’s minutes and December meeting – analysts
A slate of positive vaccine news has been weighing on gold. Still, a reversal in safe-haven flows is “misguided,” TD Securities pointed out.
“We reiterate that the reversal in safe-haven flows behind the ETF holdings is misguided — the vaccine will ultimately be a boon for gold bugs,” TD’s strategists said. “Under the Fed’s Flexible Average Inflation Targeting regime, officials will attempt to stimulate an inflation overshoot which could last years, rather than months. In this context, the vaccine should help foster higher inflation expectations associated with a firmer recovery down the road, while leaving nominal rates broadly unchanged.”
For the rest of 2020, investors will be torn between vaccine hopes and rising record coronavirus cases, said Sayed.
“With eight days to go until the end of the month, November has already added about a quarter of all U.S. Covid-19 cases since the beginning of the pandemic. The number of daily new cases is rising rapidly, and the percentage of positive tests in most U.S. states is above the recommended 5% threshold. The healthcare system is under severe stress with at least 83,000 hospitalized Covid-19 patients, and the number continues to go higher,” he noted.
In the meantime, the risk-on sentiment is on the rise, with the Bank of America monthly survey reporting that cash levels in portfolios dropped to 4.1% — the lowest level since January.
What investors need to keep in mind going forward is that most of the positive vaccine news has already been priced in. However, bad economic data is still coming.
“Whether the vaccine rally resumes in the upcoming weeks or takes a pause remains unknown. However, a lot of the positive news is already priced in, and we are yet to see the economic damage caused by the Covid-19 second or third waves. Fiscal and monetary policy should continue to play a significant role in preventing a double-dip recession, and investors will monitor those policymakers’ actions very closely until we are confident the economy can run on its own without support,” Sayed noted.