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Normal Expectations

Thursday, August 13, 2020

Normal Expectations

Since the stock market lows in March, the S&P 500 has returned to pre-covid levels, while the NASDAQ has set new highs.  Yet, we recognize our economy has not returned to pre-covid levels; millions of Americans are still collecting unemployment benefits, many businesses continue to struggle under governmental restrictions and our national debt has ballooned.  So…Why the rapid rally in the stock markets?  The short answer is that the stock markets are forward looking, where stock prices include expectations of future earnings and growth.  As our states/businesses re-open, expectations are that life will return to normal and our spending will return to pre-covid levels.  Are expectations overly optimistic?
For many, the hope of returning to normal life in a short period includes an effective vaccination that is widely available, otherwise we will continue to see states pause or reverse their re-opening efforts.  Recent news coverage on several vaccination candidates has fueled the hope of an effective vaccination by the end of the year and helped support the rising markets.
According to the World Health Organization, there are over 100 potential COVID-19 vaccines being developed worldwide, with 23 already in human trials. While the numbers are impressive and several drug companies are making progress at record pace, on average only 7% of the potential vaccines in preclinical development will prove to be both safe and effective.  None of the 23 human trials have completed Phase III, where the vaccine candidates are tested for effectiveness.  A handful have completed Phases I/II and shown immune responses, but Phases I/II were testing for safety and dosage.  Just because they pass the earlier phases, with immune responses, there is no guarantee vaccine candidates will be effective in preventing the contraction of the coronavirus and will pass Phase III.
When a COVID-19 vaccine does pass Phase III and receives approval, then it is a question of capacity and demand.  Several of the more promising candidates are being produced “at-risk”, where millions of doses are being manufactured while clinical trials continue.  If the vaccine is approved, then large quantities will be available immediately; however all of the product will be destroyed, if the vaccine candidates don’t receive approval.
Once a vaccine becomes commercially available, initial demand is expected to exceed supply.  When appearing before the House Energy and Commerce Oversight and Investigations Subcommittee on July 21st, all of the executives from the five drug manufacturers represented said the Federal Government should be responsible for allocating and distributing the vaccines.  Shortly after the hearing, the independent and nonpartisan National Academies of Science, Engineering, and Medicine announced that the current administration has asked them to develop guidance on how to distribute an eventual coronavirus vaccine.  This is a momentous task that will likely include cold chain distribution (where vaccines have to remain refrigerated or frozen) and multiple-shot regimens for millions of Americans.
Eventually supplies will catchup with demand and additional individuals will need to come forward to be vaccinated.  Some people are against vaccines in general, while others may be concerned about a newly approved vaccine that has been fast tracked through the government’s Operation Warp Speed.  Any hesitation or reluctance to be vaccinated will elongate the timeline of achieving a herd immunity and us returning to a normal life.
The current rise in COVID-19 cases has slowed our ability to return to normal in 2020.  The timeline for clinical studies and production limitations means 2021 before a significant amount of an effective vaccine can be produced.  In all likelihood the Federal Government will be responsible for the allocation and distribution of vaccines, so additional delays are possible.  While my expectations for 2021 (at least economically) is an improvement on 2020, our return to normal is even further out.
Kevin Besoe


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