Vaccine Good for Future Corporate Earnings, but US Economy Needs Fiscal Stimulus Now

Democratic candidate Joe Biden was named the new president elect on Saturday and Pfizer announced promising news on a coronavirus vaccine on Monday. Investors celebrated by driving the benchmark S&P 500 Index and the blue chip Dow Jones Industrial Average to all-time highs.

With the Biden news, the cloud of election uncertainty was dampened, but investors started to price that news in last week. The vaccine story was a shocker and came at a time when a rapid rise in COVID-19 cases threatened to derail the already fragile U.S. economy.

The news was bullish because if the vaccine is successful, it would eliminate the worst case scenario – meaning another shutdown of the U.S. economy. Investors wasted no time in dumping the tech stocks they had previously bought as a hedge against more restrictions, and moved the proceeds into stocks that could benefit the most from a return to a pre-COVID world.

Investors who bought on Monday weren’t looking at the “now”, but rather the first and second quarters of next year. Remember that stock prices discount future events.

While investors may have the luxury to play for the future, warnings persist that the U.S. economy needs stimulus now, or the current recovery will falter, eventually leading to a recession that may take months to pull out of even if the vaccine is successful.

US Chamber of Commerce CEO – Congress Must Pass ‘Essential’ Covid Stimulus before Inauguration Day

Congress has to pass on another round of coronavirus stimulus before President-elect Joe Biden is inaugurated in January, offering aid to a U.S. economy that is still grappling with the fallout of the health crisis, U.S. Chamber of Commerce CEO Thomas Donohue told CNBC on Monday.

“The stimulus bill is essential, and the sooner it’s done, the better for the beneficiaries of the stimulus and therefore better for the markets and the economy,” Donohue said on “Closing Bell.”

US Still Faces Possible Default Wave, Asset Declines Due to Pandemic:  Fed

The United States may still face a wave of debt defaults and “significant declines” in asset prices because of the coronavirus pandemic and recession, the Federal Reserve warned on Monday, in a stark reminder the economy is far from out of the woods, Reuters reported.

“As many households continue to struggle, long defaults may rise, leading to material losses” for lenders, the Fed said in its latest biannual Financial Stability Report. Business debt “has risen sharply as businesses increased borrowing to weather the period of weak earnings. The general decline in revenues associated with the severe reduction in economic activity has weakened the ability of businesses to services these obligations.”

Just a Reminder

Speculative bets on a vaccine could pay off handsomely for companies that will rely on the reopening of the economy, but we may not see the financial benefits until Q1 or Q2 of next year.

In the meantime, asset prices “remain vulnerable to significant declines should investor risk sentiment fall or the economic recovery weaken,” the Fed said.

So while the economy may benefit from a vaccine over the intermediate to long-term, it is still vulnerable to further weakness over the short-run if a new fiscal stimulus package isn’t passed in a timely matter.

For a look at all of today’s economic events, check out our economic calendar.