Many experts think that until an effective vaccine for the SARS-CoV-2 coronavirus is developed and widely deployed, the U.S. economy won’t be able to truly return to normalcy.

They’re probably right. While air travel passenger volume has very gradually started to make a comeback from the extreme lows it hit in April, many colleges have already announced plans to reopen their campuses in the fall, and states are gradually relaxing their restrictions on nonessential businesses, gatherings and the like, people’s fear of contracting COVID-19 could prevent demand for a host of things from returning to pre-pandemic levels.

Given that, it would seem logical that the development of an FDA-approved vaccine would be the Holy Grail for the stock market. And while final approval of a vaccine would likely be a positive catalyst for stocks, I’m not necessarily expecting a massive spike in the S&P 500 when it happens.

Medical worker drawing vaccine into a syringe.

Image source: Getty Images.

The market is highly reactive to coronavirus news

It’s no secret that the stock market can be moved up or down rapidly by news about coronavirus treatments or vaccine candidates. Consider a few recent news items.

On May 18, Moderna (NASDAQ:MRNA) released interim data from a phase 1 trial of its coronavirus vaccine candidate that showed all 45 participants produced antibodies. The S&P 500 rallied by more than 3% — its best day in more than a month.

Then on May 19, a report was issued that cautioned investors that Moderna’s trial data was far from conclusive. Specifically, data about neutralizing antibodies (the important kind) was only available for eight patients, and we can’t yet know if those antibodies will last in the patients’ bodies for a long time. As you can see in the chart below, the market abruptly lost some of its gains when the report was released (around 3 p.m. EDT).

^SPX Chart

^SPX data by YCharts

A few weeks prior, on April 29, Gilead Sciences announced results from its phase 3 trial of its antiviral remdesivir that showed the drug was not only effective in treating severe cases of COVID-19, but that a 5-day treatment course was just as effective as a 10-day course, which implies that the supply of the drug could be used to treat more patients. The S&P 500 rose by 2.7% that day.

The point is that the market is very reactive to news on vaccines and potential therapeutic treatments for the disease — good or bad.

This leads me to an important concept that all investors should know. The stock market is a forward indicator of the economy. This is a simplification, but at any given time, stock valuations are reflective of future economic and business strength as predicted based on the best available data. As new data becomes available, the outlook changes — for example, positive SARS-CoV-2 vaccine news from a biotech company offers hope that the country and the world could get back to normal sooner, so investors anticipate stronger corporate earnings in the nearer-term future and stock prices rise.

A vaccine could certainly be a big positive catalyst, but…

While news of a successful vaccine becoming available to inoculate the public would almost certainly be a positive catalyst for stocks, it’s difficult to say how much it would affect the market. Would the S&P immediately rocket higher by 10% or more, or would the reaction be more muted?

Nobody has a crystal ball that can accurately predict stock price movements, but I’m inclined to believe the latter.

Here’s why. At the moment, the hope is that a vaccine will be widely available early in 2021. Most experts say that even using the most accelerated possible timeline, it will take 12 to 18 months to move a vaccine through development and clinical trials. (Plenty of candidates have already been developed — but without proper studies, we can’t know if they’re effective.)

Now, the clock on that process began early this year, when research on vaccine candidates started to ramp up. So at the midpoint, a vaccine would be available by spring 2021, while a best-case scenario could see a vaccine ready by the end of the year.

The market is already pricing in a strong probability that a coronavirus vaccine will become available somewhere in that window. Obviously, there’s no guarantee that there will be a successful vaccine at all, so as indications arrive that suggest it’s more likely, the stock market will react positively.

Between now and when a vaccine wins approval, a lot of things need to happen. We’ll need to see full phase 1 trial data that paints a more complete picture of a vaccine candidate’s safety and its basic ability to provoke the desired immune response. (At least six are already in phase 1 studies.) Then we’ll need to see data from phase 2 and phase 3 trials that look more seriously at the vaccine’s efficacy at preventing COVID-19.

This will be repeated, of course, for many of the dozens of vaccine candidates being developed around the world.

The point is that every time one of them hits a new positive milestone or sets the bar higher, the stock market is likely to react positively. By the time effective vaccines are ready for widespread use, they will be expected. In a nutshell, the likely outcome is many more days where the S&P 500 jumps, but by perhaps 2% to 3% each time, as opposed to a massive, explosive rally when a vaccine gets FDA approval.

A vaccine is necessary, but not sufficient 

One final thought: While a vaccine for the novel coronavirus would likely be a positive catalyst for the markets, it could require a lot more good news before the market climbs back to its pre-pandemic highs.

Specifically, it would likely take the combination of an approved vaccine and a fair amount of positive economic data. Unemployment is a big issue. According to the Congressional Budget Office, unemployment is expected to be more than 15% in the third quarter, which shouldn’t come as a surprise to anyone. And the job market in the United States isn’t expected to suddenly rebound to its previous health, even after a vaccine is ready. In fact, the decline in joblessness is expected to be gradual — unemployment is still forecast to be 9.5% by the end of 2021.

In short, a coronavirus vaccine would give us the green light to start getting the economy back to normal. However, from that point, the actual economic normalization will likely take at least a couple years more, so the march to new stock market highs will likely be more of an ambling hike rather than a sprint.

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