The stock market could fall when a COVID-19 vaccine formally receives approval from the Food and Drug Administration. I know I’m going through it myself, as it is not guaranteed that an effective vaccine will ever be produced. But with eight vaccines now in Phase III trials, and with Russia claiming bragging rights being the first to register a vaccine, it’s not too early to start thinking about how you should react when FDA official approval for a vaccine.
To be sure, I remember the old proverb that it is difficult to make predictions, especially about the future. However, I started my speculation by looking into U.S. history to gauge how the stock market reacted in the past to the long-awaited good news. I found only four in the 20th Century that I thought were as fatal and significant as a COVID-19 vaccine could be: The end of World War I (Ceasefire Day), the days of VE and VJ at the end of World War II , and Jonas Salk Announcement of a Successful Polio Vaccine.
Become my guest to suggest other events for my group. But the four I chose were undoubtedly important. After the official end of both world wars, for example, millions in allied countries flocked to the streets to celebrate. Life magazine wrote that Americans, after hearing the surrender of Japan, began to celebrate “as if joy had been rationed and saved for three years, eight months, and seven days since Sunday, December 7, 1941. [the day of the attack on Pearl Harbor]. “
I also focused on announcing the successful polio vaccine because it is arguably the closest analogue to an eventual COVID-19 vaccine. The polio epidemic was common during the first half of the 20th century.
As wonderful as each of these events was, the Dow Jones industrial average DJIA,
fell in the news – as you can see from the graph below.
There are several explanations for this surprising result.
1. Subtraction of the future: The scholarship goes down the future. Although each of these four events was good news, without a doubt, none of them were completely unexpected. We can easily overlook this from our later perspective. In both world wars, for example, military rays had turned in the Allies’ favor shortly before official surrender declarations. And work on a polio vaccine had progressed for many years.
As a result, the stock market before these four announcements had already reflected the good news.
This market process by reducing the likelihood of increased likelihood will be even more real in the weeks leading up to an eventual 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 collaborators in this. FDA approval of a vaccine, when it comes, may be more of a non-event than we think.
One possible scenario is for the market to rally as it becomes increasingly clear that vaccine approval is imminent. When that approval is finally achieved, retail investors could very well jump into the market with both feet. In contrast, institutional money managers and professional traders – the smartest money – are likely to use that opportunity to start selling.
This is not a new phenomenon. Enough is quite common, in fact, that Wall Street has an aphorism to describe it: “Buy gossip, sell news.”
2. Political considerations: Another reason that an FDA approval announcement may not be fulfilled with a Wall Street rally is widespread distrust of the process by which vaccines are being developed in a hurry. The FDA has already set a relatively low bar – only 50% effectiveness – and many already express concern that whatever vaccine is approved will not have received the same degree of rigorous safety testing that previous vaccines have received.
Whether or not 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. As one institutional money manager told me in the background, FDA approval of a vaccine “could be the last of the good news possible, and selling it would be the right decision.”
It is worth mentioning in this regard the reaction of the stock market to the announcement of Russian President Vladimir Putin that Russia has registered the first vaccine COVID-19: S&P 500 SPX,
fell 0.8% per day.
After all? While we can only make an educated thought of what the market will do if and when the FDA finally approves a COVID-19 vaccine, do not be surprised if the market falls more than it grows.
Mark Hulbert is a regular MarketWatch contributor. His Hulbert Ratings follows investment papers that pay a flat fee to be audited. He can be reached email@example.com
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