Markets May Have a Reason to Rise Along With Covid-19 Cases

(Bloomberg Opinion) -- The Nasdaq Composite hit a record Wednesday, as the S&P 500 rose for the third straight day. This happened even with the Covid-19 pandemic growing in multiple states, and on the same day California and New York rolled back plans to allow restaurants to serve customers indoors.

Anyone looking for a convergence between markets and the state of the economy can point to the pullback in travel-related stocks since the growth in the number of coronavirus cases in Arizona, Florida and Texas began in early June. But with Wednesday bringing good news about a vaccine candidate from Pfizer Inc. and BioNtech SE, and with Phase 3 trials for other vaccines set to begin this month, we could begin seeing an even bigger divergence between the real-time economic data and a rosier future priced in by markets.

Up until now, there's an argument that markets have largely followed the progression of the virus and economic momentum, even if markets are priced for a much stronger economic environment than the U.S. was experiencing at July's onset. Stocks crashed between the latter part of February and the latter part of March as awareness grew about the spread of the virus and the U.S. saw a rolling wave of shutdowns of various forms of economic activity. Stocks bottomed on March 23, the same week that initial jobless claims peaked at 6.8 million.

The early part of April through the early part of June was the sweet spot for the progression of the virus, the economic recovery and the stock market. The 7-day moving average of new virus cases in the U.S. initially peaked on April 10, which happened to be the low point for hotel occupancy and passenger air traffic. Stocks rallied as the economy was reopening, jobless claims were falling and virus case counts were declining even as the amount of testing was increasing.

But since the early part of June there's been a setback. Virus case counts reached new highs in some Southern states that reopened their economies after they weren't hit as hard by Covid-19 in March and April. The Airline Index has fallen over 25% from its June 8 peak, some governors have ordered bars and dine-in restaurants closed again, states in the Northeast are imposing quarantines on visitors from hot spots, and there are signs that credit card spending may be slowing. For the first month since March, we could see both a worsening public health crisis and a deterioration in the economic data in July.

At the same time, the timeline for a vaccine and intermediate medical treatments may be getting closer. Moderna Inc. is expected to begin Phase 3 trials for its vaccine candidate in July, with up to 30,000 people getting a small dose. Other vaccine candidates are close behind, with Pfizer and BioNtech's entry proving safe and to have prompted patients to produce antibodies in a small early trial. On Tuesday, infectious-disease expert Anthony Fauci repeated before Congress that a vaccine could be widely available by early 2021, and the Food and Drug Administration re leased its guidelines for approving inoculations. Although there's no guarantee that we'll ever have a vaccine, it may not be long before the conventional wisdom on vaccine availability shifts from 12 to 18 months to more like within 6 months.

Over the next month or two then, we could be grappling with the conflicting narratives of a worsening pandemic but more clarity around the timeline and effectiveness of an eventual vaccine. It's possible that markets, like they were in March, will be gripped by the fear and uncertainty about knock-on effects from the pandemic hurting economic activity, employment and corporate profits. But it's just as possible that if investors have more confidence that there's light at the end of the tunnel, markets will look past whatever deterioration we get in the short-term with their focus turning to an end to the public health crisis and a stronger economic recovery in 2021.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He has been a contributor to the Atlantic and Business Insider.

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