The stock market may fall if a COVID-19 vaccine receives formal FDA approval. I know I’m advancing myself because it does not guarantee that an effective vaccine will ever be produced. But with eight faxes now in Phase III studies, and with Russia claiming bragging rights by being the first to register a fax, it’s not too early to start thinking about how to must respond when formal FDA approval for a vaccine arises.
Surely I am reminded of the old adage that it is difficult to make predictions, especially about the future. However, I began my speculation by searching through American history to measure how the stock market has reacted to long-awaited good news in the past. I found only four in the 20th century that I considered as fatal and important as a COVID-19 vaccine could be: The end of World War I (Day of the Armistice), VE and VJ days on the end of World War II, and Jonas Salk’s announcement of a successful polio vaccine.
Be my guest to suggest other events for my subset. But the four I picked were undoubtedly momentous. After the formal end of both world wars, for example, miles across the Allied nations in the streets in celebration. Life magazine wrote that Americans, after hearing of the surrender of Japan, began to celebrate ‘as if joy had been rationed and saved for the three years, eight months and seven days since Sunday, December 7th. 1941 [the day of the attack on Pearl Harbor]. ”
I also focused on the announcement of the successful polio vaccine, as it is probably the closest analogue to a possible COVID-19 vaccine. Polio epidemics were common in the first half of the 20th century.
How wonderful, however, was each of these events, the Dow Jones Industrial Average DJIA,
fell on the news – as you can see from the graph below.
There are several explanations for this surprising result.
1. Discount for the future: The stock market shortens the future. While each of these four events was untimely good news, none were entirely unexpected. We can easily overlook that from our decades-later perspective. In both world wars, for example, the military tide had been turning in favor of the Allies for some time prior to the formal surrender declarations. And work on a polio vaccine had progressed many years.
As a result, the stock market had already reflected the good news prior to these four announcements.
This process of the market reducing the increasing chance is likely to be even more likely in the weeks leading up to a possible FDA approval of a COVID-19 vaccine. The news media today obsessively reports every medical development and the results of every trial, and biotech companies are willing to co-operate in this. FDA approval of a vaccine, if it comes, could be more of a non-event than we think.
One possible scenario is that the market counts, as it becomes increasingly clear that vaccine approval is close. When that approval finally arrived, retail investors were able to jump into the market with both feet. In contrast, institutional money managers and professional traders – the worse money – are likely to take that opportunity to start selling.
This is not a new phenomenon. It’s just enough that Wall Street has an aphorism to describe it: “Buy on the rumor, sell on the news.”
2. Political considerations: Another reason that an announcement of FDA approval may not be met with a Wall Street rally is the widespread mistrust in the process by which vaccines are rapidly being developed. The FDA has already set a relatively low bar – just 50% efficiency – and many are already talking about concerns that what vaccine is approved will not have received the same degree of rigorous safety testing as previous vaccines.
Whether these concerns have merit, they have economic consequences. The slow adoption of a marginally effective vaccine will not lead to a rapid end to the pandemic or to a particularly strong and rapid economic recovery. If one institutional money manager told me in the background, FDA approval of a vaccine “would be the last bit of good news possible, and selling would be a fair decision.”
It is worth mentioning in this connection the reaction of the stock to the announcement by Russian President Vladimir Putin that Russia has registered the first COVID-19 vaccine: The S&P 500 SPX
fell 0.8% on the day.
The einline? Although we can only make an informed guess as to what the market will do if and when the FDA finally approves a COVID-19 vaccine, you should not be surprised if the market falls instead of emerging.
Mark Hulbert is a regular participant in MarketWatch. His Hulbert ratings follow newsletters for investors who pay a fixed fee to be audited. He is reachable at [email protected]
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