Investors Think We're Only At The Pandemic's Halfway Point

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Posted: Nov 23, 2020 11:43 AM
Investors Think We're Only At The Pandemic's Halfway Point

Source: AP Photo/Ted S. Warren, File

In the previous edition of our S&P 500 chaos series, we reported investors had shifted their forward looking focus from 2020-Q4 outward to 2021-Q3, after news of an effective vaccine to combat the SARS-CoV-2 coronavirus pandemic broke.

Since then, news of more vaccines developed to prevent COVID-19 filled the news stream, and investors have remained focused on 2021-Q3. The latest update to our alternature futures chart visualizes that state of affairs through the close of trading on Friday, 20 November 2020.

Why would investors focus on 2021-Q3 in response to positive vaccine development news? Or rather, why wouldn't they focus their attention on any other future point of time?

Investment manager Barry Ritholtz explains why investors would seeming pluck 2021-Q3 to focus upon out of thin air in his 20 November 2020 blog post "The Halfway Point". Go read the whole thing, but here's an excerpt that takes investors right up to the doorstep of 2021-Q3.

Here is a shocking observation:

The pandemic lockdown began in March of 2020. As of today, the two leading vaccine candidates from Pfizer and Moderna are requesting FDA approval for emergency use, then a fast track approval for distribution. These should become available in Q1, then be more widely distributed in Q2 and Q3. Best estimates for any form of herd immunity is later next year. Expectations are for life to begin to return to normal — meaning, going to back to work, mask-less social interactions, commuting, public events, etc. — are for sometime around June 2021.

From the March 2020 lockdown to a June 2021 re-opening is a 16-month span. The halfway mark? It’s today.

What we're seeing in the alternative futures chart suggests investors are being a bit more cautious in anticipating the post-pandemic "reopening" beginning after June 2021, but otherwise, what Barry is describing is exactly how investor expectations have come to focus on a specific point of time in the future, which is directly affecting today's stock prices.

That's exactly what the dividend futures-based model we use to project the potential future trajectories the S&P 500 might take is designed to do, provided you know how far forward in time investors are focusing their attention in planning their current day investment decisions. And now, even though nothing in the news itself has specifically pointed to that future quarter, we now have a coherent explanation for why investors would suddenly fix their forward-looking attention upon the distant future quarter of 2021-Q3.

At least, until they have reason to shift their focus to another point of time in the future, or the expectations for dividends at that point of time significantly changes. Both of which is subject to the random onset of new information.

Speaking of which, here are the samples we pulled out of the news stream for the week that was, based on their market-moving potential.

Monday, 16 November 2020
Tuesday, 17 November 2020
Wednesday, 18 November 2020
Thursday, 19 November 2020
Friday, 20 November 2020

The Big Picture's Barry Ritholtz also listed the positives and negatives he found in the past week's economics and markets news. Barry's weekly series is a good starting place for picking up additional context that percolates in the background beyond the headlines we feature for their market-moving potential.

On a final note, sharp-eyed readers will note that over the projected future of next two weeks, the alternative futures chart is showing a relatively short duration "echo" of the volatility that struck the market about a month ago. This is an artifact from the model's use of historic stock prices in setting the base reference points from which it projects the future. For longer duration events, we will often add a redzone forecast range to account for the echo effect, but since this upcoming echo is comparatively short, we'll simply note that the trajectory of the S&P 500 will likely appear to "run hot" with respect to the model's projections over these weeks.