S&P 500 Index Weekly Forecast: All eyes on the covid vaccine roll-out

Driven by poor economic data, the expectations of a protracted negotiation of President-elect Biden’s $1.9trn COVID-19 economic plan and rising anxiety over the Italian government’s stability, risk markets are back under pressure as the year gets going. 

Moreover, the sheer uncertainty of the vaccine programmes and wide skeptisim of such is beginning to weigh as well. 

Stock and oil prices fell on Friday, pressured by intensifying lockdowns and weak US Retail Sales data, while the dollar index posted its largest weekly gain in more than two months. 

The S&P 500 fell 0.7%, and the Nasdaq 0.9%, while earlier, the Euro Stoxx 50 was down 1.1% and the FTSE 100 fell 1.0%.

The yield on the US 10-year note fell 4.6bps to 1.084%. WTI oil fell 2.3% to $52.36/bbl on demand concerns. 

However, the S&P 500 banks index. SPXBK, was a major contributor to the losses.

Shares of Wells Fargo & Co WFC, JPMorgan Chase & Co JPM and Citigroup Inc C dropped even though they had posted better-than-expected fourth-quarter profits.

Wells Fargo, down 7.8%, was among the biggest weights on the S&P 500, along with ExxonMobil, down 4.8%. 

US bond yields and stocks have risen recently, partly on expectations about the rollout of coronavirus vaccines and on a huge stimulus plan by the incoming Democratic administration. 

President-elect Joe Biden on Thursday unveiled a $1.9 trillion economic aid plan earlier in the week. 

With these uncertainties now nipped in the bud, markets will get back to economic data, monitoring the covid spread and vaccinations as well as earnings. 

Vaccination uncertainties

The vaccination campaigns have progressed more slowly than expected around the world, allowing time for variations of variants and this will be of concern. 

Combined with the prospect of stricter lockdowns in Europe, as well as a resurgence of COVID-19 cases in China, investor sentiment will likely be on edge over coming days. 

“It’s carnage out there,” says Andrew Read, an evolutionary microbiologist at Pennsylvania State University, University Park.

However, he also added that “twice as many people with partial immunity has got to be better than full immunity in half of them,” which, apparently, had also been the view of the stock market.

However, the record case counts also create an exceptional milieu.

There are untold billions of viral replications occurring every second for mutations to arise as the virus makes errors in copying its genetic alphabet.  

One viral variant, describe a new SARS-CoV-2 lineage (501Y.V2), first spotted in South Africa, has evolved two mutations that block the effectiveness of antibodies used to treat COVID-19, raising the spectre that they could also block vaccine-induced antibodies.

Historically, few viruses have managed to evolve resistance to vaccines, with the notable exception of our seasonal influenza, for what COVID has been so closely correlated as far as spread and symptoms go. Influenza evolves rapidly on its own that it requires newly designed vaccines every year.   

Meanwhile, if over time the novel coronavirus does mutate significantly, researchers can update the vaccines, says Lucy Van Dorp, a computational geneticist at University College London. 

The RNA vaccines made by Pfizer and Moderna “are very well suited to updates,” she said. 

The chief executive of BioNTech, which first developed Pfizer’s vaccine, recently told The Financial Times that “we could manufacture a new vaccine within 6 weeks.”

With that said, however, it may well be a task to get people to take the vaccines at all.

There is a direct link between support for conspiracy theories and scepticism toward vaccination.

Besides some of the baseless theories that have alleged that the virus isn't real or that it's a bioweapon created by the US or its adversaries, there is justified caution nonetheless. 

Vaccine hesitancy is not new. There are many reasons to temper this optimism as there is a lot we don’t know about the safety and long-term efficacy of these vaccines.

There is a spectrum that ranges from hardcore anti-vaxxers to those with reasonable concerns about safety.

For instance, recent headline, Bloomberg reports that Norwegian officials said 23 people had died in the country a short time after receiving their first dose of the vaccine. 

''Norway said Covid-19 vaccines may be too risky for the very old and terminally ill, the most cautious statement yet from a European health authority as countries assess the real-world side effects of the first shots to gain approval.''

''Pfizer and BioNTech are working with the Norwegian regulator to investigate the deaths in Norway, Pfizer said in an e-mailed statement. The agency found that “the number of incidents so far is not alarming, and in line with expectations,” Pfizer said.''

Nevertheless, the article also explained that ''allergic reactions have been uncommon so far.''

In the US, the article states that ''authorities reported 21 cases of severe allergic reactions from Dec. 14-23 after administration of about 1.9 million initial doses of the vaccine developed by Pfizer Inc. and BioNTech SE. That’s an incidence of 11.1 cases per million doses, according to the Centers for Disease Control and Prevention.''

Safety reports on the Pfizer-BioNTech vaccine will be paid close attention to in the stock markets. Vaccine makers are required to submit data monthly.

We will probably see data published at the end of January, the regulator’s key medicines committee said Friday. 

There’s a lot of good news around vaccines and stimulus priced into equities, but such optimism is being challenged as the reality of a tough few months as the variant spreads is upon us. 

However, so long that we are hearing successful progress in global immunization, it will definitely be encouraging for stocks in 2021.

Economic data in focus

In the meantime, economic data is in focus and the latest drop 0.7% MoM drop in US Retail Sales was the third consecutive fall. Retail Rales account for 35% of private consumption, itself 70% of Gross Domestic Product. 

The near-term outlook for consumption, the main driver of economic growth, is poor.

''The near-term outlook for consumption, the main driver of economic growth, is poor,'' analysts at ANZ Bank explained.

''The on-the-ground reality evident from weak US Retail Sales, job losses and subdued core inflation is a lot more sober than the buoyancy that followed vaccine announcements. The data will again bring into question the durability of the recent move higher in bond yields and rise in inflation compensation.''

We will have to wait and see if the US stock market will take any solace in Joe Biden's inauguration on the 20t after the $1.9tn proposal.

After all, the extra stimulus is unlikely to change the need for ultra-easy Federal Reserve policy.

S&P 500 technical analysis

Bears can target a weekly resistance as the nose of the W-formation that meets a 50% mean reversion of the rally coming in at 3531.91