Markets May Be Underestimating Likelihood Of Early Emergence Of COVID-19 Vaccine: Goldman Sachs

Strategists at Goldman Sachs contend the market is underestimating the chances of an effective COVID-19 vaccine emerging faster than expected.

In a research note to clients, Goldman cited projections by consulting firm Good Judgment, which said that there is nearly a 40% chance of a vaccine becoming “broadly available” by the end of March 2021 – up from its previous 10% projection.

“There is a good chance that at least one vaccine will be [Food and Drug Administration]-approved by the end of November [2020] and broadly distributed by the middle of 2021,” Goldman noted.

“This kind of timeline could see a substantial boost to [gross domestic product] relative to a ‘no-vaccine’ case, particularly for the U.S., which is likely to lead the vaccine race and is likely to experience worse outcomes than in Europe without a vaccine,” the strategists added.

Bloomberg reported Goldman suggested the emergence of a vaccine could also unsettle markets by causing a sell-off in bonds and push equity investors out of technology stocks and into cyclical names.

Approval of a COVID-19 vaccine, Goldman noted, could “challenge market assumptions both about cyclicality and about eternally negative real rates.”

Goldman further added that markets will be heavily influenced by the U.S. presidential election and the ongoing trajectory of the virus.

In the event a new drug is approved in tandem with a new administration in Washington, emerging market equities would benefit “if trade policy risks diminish while U.S. tax risks rise.”

Although Goldman cautioned it is still too early for investors to prepare a shift in their strategies, they might consider engaging in option trades. Goldman indicated that some call options on the S&P 500 index look attractive -- strategists saw upside to about the 3,700 level in the event of the early development of a vaccine. The downside target would be at the 2,200 level in the event of a second wave of the virus and the related slowdown in business activity. (The index closed about 3,328 on Wednesday).

On Monday, CBS reported, Daan Struyven, a senior economist at Goldman, said: "While highly uncertain, our baseline expectation is that a large number of vaccines eventually gain approval with at least one FDA approval this year.”

Struyven noted that drugmakers have 28 vaccines in human clinical trials, including about a dozen that have reached phase 2 trials and six in phase 3.

"For context, it took hepatitis B -- the disease with the largest number of attempts -- decades to reach the number of developments COVID-19 has sparked in a few quarters," Struyven said.

Still, he cautioned: "An early [FDA} approval does not imply full effectiveness or long-run protection.”