Trying to game out anything in the 2020 financial market can be a humbling experience. Massive fiscal and monetary stimulus has been doing battle with a historic recession and a pandemic. Would you have expected a crash? You got one in February and March. And then came a rally right on its heels, bringing stocks back near record highs.
So nothing is obvious. Still, on the list of events with the potential to reorder sentiment on a dime, one prospective catalyst is on almost every forecaster’s mind: the discovery of a vaccine for the Covid-19 coronavirus. If and when one comes, it ought to be a massive boost for investors, right? Wall Street pros answer with an emphatic “Maybe.” Here are three scenarios gleaned from money managers and strategists:
1. A New Taper Tantrum
A successful vaccine and the subsequent return to regular life could quickly shift policymakers’ attitudes toward the extraordinary economic stimulus they’ve poured on. If they decide to taper back those efforts quickly, the market’s celebration could be brief.
The Federal Reserve’s balance sheet ballooned to $7 trillion as it pumped liquidity into the financial system, ramping up Treasury purchases and wading into the corporate bond market for the first time. The central bank’s largesse, combined with a wave of “follow the Fed” bond-buying, pushed Treasury yields to historic lows and kept corporate borrowing cheap. That was bullish for stocks, too. Investors saw that companies would still be able to get credit, and the slim yields on bonds made equities look like a better deal.
Some worry that a return to normal could lead to a replay of what happened in 2013, when investors took fright as the central bank signaled it would wind down the quantitative easing program it began after the financial crisis. Stocks and bonds fell in tandem then. “The risk is a taper tantrum,” says George Mussalli, head of research and chief investment officer for equities at PanAgora. “That’s what everyone is going to be worried about.”
It might be a matter of execution, says Yousef Abbasi, global market strategist at StoneX, a financial-services network. “The Fed will have to gently and carefully pull back from the policy measures enacted during the pandemic, and it will likely create a period of elevated volatility and indigestion for these markets,” he says. “That is, of course, unless Chairman Jay Powell is a better magician than his contemporaries.”
2. Everything Just Gets More Expensive
Maybe worrying about a taper tantrum is overthinking it. We’re talking about a vaccine to tame a virus that’s stopped the global economy in its tracks. “If there is anything that would cause a major rally, that would have to be it,” says Randy Frederick, vice president of trading and derivatives for Schwab Center for Financial Research.
The Fed wouldn’t necessarily rush to step away from massive stimulus efforts. Before the pandemic hit, it was still only gradually unwinding its response to the 2008 crisis. “Once you start quantitative easing as we did many years ago, it’s going to be hard to stop, and that’s pretty much what we’ve seen across the globe,” says Katy Kaminski, chief research strategist and a portfolio manager for AlphaSimplex Group.
Even after people start getting their shots, the unemployment rate will take some time to decline from its current 10%. “Effectively, the Fed wants rates low and credit conditions easy, providing more fodder for the recovery,” says Gennadiy Goldberg, a senior U.S. rates strategist at TD Securities. The result could be a supercharged status quo across markets, whereby already expensive stocks continue climbing and the Fed’s backstop keeps bond values high and their yields low.
3. Value Revival
Value stocks—shares trading at low prices relative to their earnings or assets—might emerge as thenew winners in a post-vaccine world. That’s particularly the case for such laggards as airlines, consumer companies selling nonessential items, and financial companies, says Tai Hui, chief Asia market strategist at JPMorgan Asset Management in Hong Kong.
The value case leans on the fact that the current bull market hasn’t actually been so great for many stocks. Gains have been concentrated in a handful of tech-related stocks that investors see as particularly well-suited for the stay-at-home economy. Take Alphabet, Amazon.com, Apple, Facebook, and Microsoft out of the picture and the S&P 500 would have been down more than 2% for the year , instead of its current gain of 4.7%. A vaccine that lets people travel, eat out, and shop at the mall again could give other companies a fighting chance.
The caveat to all of these scenarios, of course, is that creating an effective vaccine is no easy feat. Neither is disseminating it broadly. In the end, something like a taper tantrum would count as a relatively good problem to have—especially if investors have been implicitly assuming an eventual vaccine and baking that into current prices. “The failure to produce a vaccine would mean that herd immunity will be the only effective path toward ending the pandemic,” says Peter Berezin, chief global investment strategist at BCA Research Inc. in Montreal. “This would be highly disappointing for risk assets.” In other words, for stocks. —With Lu Wang