et’s count the Puts that are keeping any Bad News Bear from biting this market.
Of course, first and foremost there’s the Federal Reserve Put (or Powell Put for lovers of alliteration). The Fed has told investors they can expect the current near 0% interest regime to continue into or through 2021–along with a continuation of the Fed’s current policy of buying just about every asset class in existence. That places a solid floor under the stock market–no stock price can be too high if the Fed is committed to keeping the price of every other asset class calm and it yield low.
Then there’s the Coronavirus Rescue package Put. Congress will (gosh, don’t they just about have to?) pass another big package that puts $2 or $3 trillion more in direct checks, infrastructure spending, payments to states, and loans to small businesses (or to businesses connected to members of Congress or the Trump administration.) All that cash will stimulate the economy even if more states resume restrictions on business activities in an attempt to slow the current surge in coronavirus cases.
And there’s the vaccine Put. No matter how bad the coronavirus outbreak is now and no matter how much damage is being done to the economy now, it’s all short term since we’ll have a vaccine ready for distribution to the general population by the end of 2020. Which makes the current virus surge–and the apparent lack of will in many politicians to do something unpopular to combat it–a very short term problem.
And finally, on the evidence of today’s performance, there’s the remdesiver Put. The Standard & Poor’s 500 stock index was down in the early going–off 0.48% at 10.04 a.m. New York time–before beginning a solid rally that pushed the index up by 1.05% by the end of trading.
The big difference was an announcement from Gilead Sciences (GILD) that its remdesivir drug reduced the risk of death in Covid-19 patients. That directly addressed the market’s fears this morning that a surge in coronavirus cases was about to overwhelm medical systems in Texas, Arizona, Florida and other states, and that as a result much of the United States was headed back to reclosing economies that had just reopened.
For the day, the Dow Jones Industrial Average closed up 1.44%; the NASDAQ Composite finished ahead 0.66%; and the Russell 2000 small cap index ended 1.70% higher. The iShares MSCI Emerging Markets ETF (EEM) closed down 0.64%.
The problem with a market reliance on these Puts is that they may not be as solid as is currently assumed.
Oh, I’d say the Powell Put from the Federal Reserve is about as solid as they come. The Fed actually tries to manage its credibility and the central bank has gone out of its way to be very clear on holding rates near 0% for the foreseeable future.
From there, though, the Puts get increasingly unreliable. Congress could pass something as substantial as the $3 trillion package put together by the Democrats in the House of Representatives or it could pass a much smaller package was has been proposed by Senate Republicans–or nothing at all.
The vaccine could arrive by the end of 2020–or not. It could be distributed to the general population by early in 2021–or not. It could be effective in producing immunity of long duration–or not. And there is, of course, the possibility that none of the current vaccine candidates will work at all.
And finally, there are all those uncertainties about remdesiver. The drug does indeed look to reduce the duration of hospital stays for patients with a specific severity of Covid-19 and today’s announcement from Gildead certainly suggests that the drug reduces the risk of death in patients with severe cases of Covid-19, but the results are very preliminary. Gilead found that remdesivir cut the risk of death by 62% (that is after 14 days, 7.6% of severely infected Covid-19 patients who had received remdesivir had died versus 12.5% deaths among patients who didn’t receive the drug) in severe Covid-19 cases when compared to a group of patients given standard care. This conclusion results from comparing two different data sources and is a long way from a typical clinical study with a placebo and at this stage we don’t know what that kind of trial would show (or even if we’ll get aa standard placebo clinical trial given the ethics of letting some patients in the control group die who could, maybe, have been saved.)
Equally important at this point, the financial markets don’t know how this treatment effects the economics of caring for Covid-19 patients and the effects on stressed hospital capacity of caring for Covid-19 patients who get really sick and then recover. We do know that the coronavirus can result in serious and long-lasting damage to organs that include the liver, lungs, and brain, and to the immune system. It’s great if remdesivir prevents people from dying but the evidence is that no one wants to get this virus and suffer its effects even if they don’t die.
The effect of the remdesiver news today may tell us more about the nervousness of the stock market than it does about the effect of the drug on this crisis. At least at this point.