The light at the end of the tunnel is very faint

Over the last two weeks, the mood in markets and the public in general has clearly become more pessimistic when it comes to the Covid pandemic. Everybody braces for the second wave that is about to hit Europe and the United States in the next weeks and months. This, in turn means that restaurants, bars, and other entertainment venues will likely face more and more restrictions putting their existence at risk.

The silver bullet to end all this is the arrival of a vaccine that is reliable and can be rolled out to large parts of the population. Of course, this assumes that people are willing to be vaccinated. The anti-vaxxers are already running a campaign against the vaccine, thereby putting the entire effort at risk. If sufficiently large minority of people refuse to be vaccinated, then the virus can continue to spread and infect people.

One way to convince more people to be vaccinated is to ensure that any vaccine will go through the rigorous safety tests that are normal before approving a drug. But this takes time. The Liberum healthcare analyst Graham Doyle has compiled the publicly available data on the vaccines currently in development. Below is the list of earliest approvals for use.

Earliest vaccine rollouts

Source: Liberum

The problem is that the earliest date for vaccine data to become available is at the end of 2020. Then we have to go through the safety tests, approvals and build the capacity to mass produce the vaccine in large quantities and roll it out to the public (which in itself is a massive logistic undertaking). In the view of Graham, and I agree with that view, we are looking at the earliest start of a widespread vaccination programme in summer or Q3 2021, one year from now. Until then, restriction to our daily life will have to remain in place.

But please be aware that this scenario assumes the best possible case, not the likely case. The development of a vaccine can get delayed (and typically does), approval can get delayed (and typically does), the construction of mass production sites runs into trouble (and typically does) and the transport of vaccines to end consumers can get disrupted. So, a realistic scenario is that a widespread roll-out of the vaccine won’t happen before autumn 2021, in my view.

Now add the anti-vaxxers who can undermine the entire effort plus the fact that no vaccine is 100% effective. If 30% of the population refuses to get vaccinated and the vaccine is only 70% effective, then even after a vaccine is rolled out, 30% plus 30% * 70% = 51% of the population can still get infected. And that is more than sufficient to allow the virus to continue to spread and keep the pandemic going. Thus, it seems likely to me that we will have to live with social distancing measures of some sort or another throughout the entire year 2021 and probably well into 2022.

This has significant implications for financial markets as you might have guessed. Harrison Hong and his colleagues published a study a few weeks ago that looked at the average analyst expectation for a return to normalcy in corporate earnings. As of May 2020, the average time to the arrival of a vaccine and a return to normalcy (i.e. not only vaccine approval but widespread roll-out) implied in analyst forecasts was 0.96 years, or May 2021. A 95% confidence interval reached from 0.72 years (i.e. February 2021) to 1.71 years (February 2022). Except for the most pessimistic analysts, everyone at the moment has far too optimistic expectations for when we get control over this pandemic. And this is a recipe for much more subdued equity market returns over the next 12 months.