What an amazing cover we saw on The Economist this past week.

Indeed, the vaccine news out of both Pfizer / BioNTech & Moderna blew the doors off the expectations. Many were hoping for a 60-70% efficacy rating on these first vaccines but both candidates came in with over 90%. When evaluating those numbers, keep in mind that the seasonal flu vaccine efficacy has not exceeded 52% in at least the past 10 years per the table below from the CDC.  To develop these vaccines in such a short amount of time with such high efficacy is a remarkable achievement.

A 90+% efficacy rate puts these vaccine candidates up there with Polio and Mumps in terms of effectiveness. It is as good a result as we could have hoped for.

However, it is important to temper the jubilation with some important realities. First, while both companies have said that millions of doses will be available by the end of the year, both require two shots. So, you must halve the delivered doses to get the number of people vaccinated. The frontline healthcare workers and those at most risk could realistically be vaccinated by the time daylight savings starts in 2021. From what we know about the disease, most of the deaths come from this higher risk group, so the number of people dying from Covid should be drastically reduced after the first few tiers of priority patients is vaccinated. The rest of us will have to wait until the middle of next year, but restrictions should likely be eased before then as the mortality rate presumably plummets.

Additionally, there are challenges with the transportation and delivery of the vaccine itself. The Pfizer candidate must be kept at an ultra-cold -80 degrees Celsius. The Moderna candidate requires only regular refrigeration temperatures, a distinct advantage. But even so; manufacturing, distributing, injecting, and tracking billions of people over the course of a year across the globe is one of the most difficult logistical challenges humanity has ever faced.

We have also discussed in a previous piece the potential for significant public resistance to mass vaccination, and what the public policy response will be to those who refuse to get the vaccine. This could present significant challenges as we progress through the distribution phase and may stall the progress after the most willing people receive their doses.

Meanwhile, all the dials of the pandemic are screaming in the wrong direction. Cases are going exponential, hospitalizations are at record levels, and health systems in several states are well in to surge capacity and facing shortages. Restrictions are once again being enacted in many areas, posing significant risks to the solvency of businesses that have managed to scrape by these past eight months.

Economically, the pandemic has supercharged the trends we were seeing in place pre-Covid. One of them is that the big have gotten bigger… way bigger. Using the S&P 500 as a benchmark for your diversified equity investments is making less sense than ever. Almost one-quarter of the S&P 500 index return is driven by just five stocks. Note Microsoft with the staying power through the decades.

Insiders are very unconvinced that the rally will continue from here, as evidenced by their transactions.

The unemployment numbers have been trending slowly in the right direction, despite coming down from record levels. As we progress in to the winter and consumers reduce their mobility as temperatures drop, these numbers will be an important indicator on the health of the recovery. We almost certainly need more stimulus to prevent this trend from reversing.

The risk to economy is huge, and we are walking a tightrope. It is likely that many more businesses will not survive the winter.

But for those that can make it through, on the other side lies the potential to reap great rewards in the second half of 2021. It is not difficult to envision a post-pandemic consumer surge. Over a year’s worth of pent-up demand being unleashed en masse, and this chart of savings deposits is a dam that will be ready to burst once the coast is clear, flooding through the economy.  As we know, the stock market is a forward discounting mechanism. It is pricing in this 2nd half 2021 return to normalcy. Any alteration to that timeline will have adverse effects.

It is said that the night is darkest before the dawn, so we likely have some long and dark days still ahead of us. Please be safe as the urge to gather becomes inevitably stronger, and trust that even though this holiday season may be one to forget, next year could be one of the best we’ve ever had.

Zachary S. Mineur, CFA
Chief Investment Officer
Independence Square Advisors