Stock markets love to take everyone by surprise, and less than a year from now a very big surprise will have played out: Stocks will be a lot higher by June as the economy moves into overheat mode.
How do we get from the current grim state of affairs to this very different world? Two steps.
1. By the turn of the year we will have vaccines for COVID-19. They won’t be perfect. But they will be good enough at protecting the most vulnerable — so most people can get back to work and the economy can begin to repair.
2. By next June, the massive stimulus dumped on the economy by politicians and the Federal Reserve will have kicked in in full force, sending the economy into overdrive. That will push S&P 500
and the Dow Jones Industrial Average
much higher. Below I suggest specific stocks and sectors that will do the best, taken from my stock letter Brush Up on Stocks.
Sound far-fetched? You bet. And there are risks to my forecast. But the big market changes always come out of left field and take most people by surprise. Improbable, out-of-consensus bets are usually the best bets — as long as there is sound logic.
Here, we have it, for two reasons.
1. Vaccines are on the way soon
For help with vaccines, I turn to Jefferies
biotech analyst Michael Yee. Yee just updated his overview of vaccine approval timelines, and his outlook, which he discussed with me, is good news for bulls. What I see in the earnings calls and filings of seven key vaccine players confirms Yee’s view.
The key takeaway: We get vaccines that are “good enough” as early as a few months from now, and more by the turn of the year.
Pharma insiders agree. “The results we’ve seen thus far from a variety of early studies, Phase I studies, are as good as one could hope for,” said Roger Perlmutter, Merck
research laboratories’ president, in the company’s July 31 earnings call. Immune responses are “quite good,” he says. Perlmutter cautions we won’t know for sure until Phase III study results come out. But that’s happening soon.
Will those trials show wins? Anthony Fauci, the director, of the National Institute of Allergy and Infectious Diseases, is positive. And history is on our side. From the end of Phase I studies, vaccine candidates have a 42% chance of approval, according to MIT Sloan School professor Andrew Lo. That is the highest probability among all types of clinical trial candidates.
Find the latest coronavirus coverage on MarketWatch here.
The big three
The key vaccine efforts to focus on first are at Moderna
the joint venture at Pfizer
They are probably the furthest along among the big players. Yee gives their vaccines as much as a 65% probability of working, meaning they reduce symptoms — by 60% in the case of Moderna.
This would help get the economy back on track, because the most vulnerable could be protected. That would bring down the hospitalization and death rates — the whole reason we’ve been in lockdown. “If you have a vaccine that provides a 60% reduction in symptoms, I think that will lead to significantly less disease burden, less hospitalizations and less death,” says Yee. “The early data are very promising.”
Here are Yee’s timelines for the big three, based on company guidance and his own estimates of enrollment and natural infection rates in trials. (Deliberately infecting people is a no-no, so vaccine companies have to wait for them to get Covid-19 in their day-to-day lives.)
It could have Phase III data as early as October, and file for approval with the Food and Drug Administration in November, says Yee. Moderna CEO Stéphane Bancel says the odds of success in Phase III trial are 80%. “We know our platform,” says Bancel, citing research on other vaccines.
The company is ramping up production now so it can get doses out quickly after approval.
The company could post Phase III data as early as late September or early October, and file for emergency use authorization as early as October. Pfizer CEO Albert Bourla says the odds of success are very high. “I’m optimistic based on the data I have seen so far.”
The company has started enrollment in a Phase III trial and administered doses to the first patients July 27. It plans to enroll 30,000 patients by the end of August. Pfizer says it can supply up to 100 million doses by the end of 2020 and 1.3 billion doses by the end of 2021. In addition to producing neutralizing antibodies which help protect people from getting Covid-19, Pfizer’s candidates rev up T cells which kill cells that the virus has entered.
“I think we’re on to something really unique in our platform here with that dual way of combating the infection,” says Mikael Dolsten, the chief science officer.
In early results released in July, AstraZeneca’s vaccine showed both antibody and T-cell immune responses. Updated data could be available in the fall, says Yee. Predicting the timing is a bit more difficult, he says, because a lot of its studies are happening in Europe where infection rates are lower. It’s harder to predict when the company can hit critical mass on infection rates in studies.
The big four
These are a little behind the big three in timing, but their potential vaccines are well advanced.
Johnson & Johnson
Johnson & Johnson
will launch Phase III studies of its vaccine candidate Ad26 in September. It will post data by the end of the year or early 2021, says Yee. Early results from primate studies suggest effectiveness. Ad26 may work with just one shot, a plus.
has yet to report even Phase I data, but it is on the same timeline as Johnson & Johnson in, says Yee, with definitive data around the turn of the year. It is collaborating with GlaxoSmithKline
company hopes to start clinical studies of its V590 vaccine candidate (which works against Ebola) in the next few months, and its V591 candidate later this quarter. These may work with a single injection. People might also be able to take V590 orally, in what the company calls a “swish and swallow” delivery. Preclinical studies show both stimulate neutralizing antibodies.
announced positive Phase I trial results for its NVX CoV2373 on Aug. 4. The Covid-19 vaccine, based on Novavax’s recombinant nanoparticle technology, was deemed safe, and it produces significant antibodies.
Besides vaccines there are also therapies in the works. Merck’s MK-4482 may act by blocking viral replication. It’s in Phase II trials and will start large Phase III trials in September. This would be taken as a pill, a plus compared to Gilead’s
remdesivir which is delivered via infusion. Merck’s MK-4482 works by disrupting genetic code in the virus to stop replication.
Of course, there are plenty of risks to my out-of-consensus bullish scenario. The big risk is that none of the vaccine trials pan out. This is possible.
“There have been cases that you have very, very strong clinical data in the Phase II, and the Phase III for some reason doesn’t work,” says Bourla, the Pfizer CEO. But again, he describes the odds of success with a vaccine at Pfizer as very high. “The data that we have seen so far are very, very, very strong.”
Another concern is that even if we get a vaccine, people won’t take it. This may be a false fear. Faced with the real possibility of death, people in high-risk groups (the overweight, the elderly, and people with diabetes and cardiovascular issues, among others) will take vaccines. And they are the ones that matter for bringing down hospitalizations and death rates — the necessary condition to get the economy on track again.
Next, there’s been a lot of damage to the economy, with so many businesses closing for good. But the amount of fiscal and monetary stimulus put into the economy is so big, we could be nevertheless in a market melt up and economic overheat scenario by next June, predicts Leuthhold Group strategist and economist Jim Paulsen. Especially if vaccines lift a lot more lockdown and get people back to work. Stimulus can take a year to kick in.
In the interim, good Phase III vaccine results rolling out between September and November would be an important de-risking event for investors, Yee says. I think it will have investors thinking more about Paulen’s overheat forecast, which is definitely out of consensus at the moment.
What to buy
Broad market indexes are “safe,” for their diversification. Ironically, biotech may not be the best place to be since it has served as a haven so far in the COVID-19 crisis. A Joe Biden victory is also a risk factor.
For extra gains, consider cyclicals, which often do the best as economies rebound. I’ve recently suggested banks, financials and tech like JPMorgan Chase
B. Riley Financial
in my stock newsletter.
Exchange trades funds like Fidelity MSCI Industrials
iShares US Industrials
Industrial Select Sector SPDR
Invesco S&P 500 Equal Weight Industrials
and SPDR S&P Transportation
also fit the bill.
At the time of publication, Michael Brush owns shares in RILY. He has suggested PFE, AZN, JNJ, MRK, NVAX, JPM, RILY and INTC in his stock newsletter Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist Group, and he attended Columbia Business School. Follow him on Twitter @mbrushstocks.