Financial markets certainly have reacted to the good news on the vaccine front.
The S&P 500 SPX, +0.28% has gained about 6% since Pfizer PFE, +3.18% first announced its vaccine was more than 90% successful in treating COVID-19, as has the MSCI World 892400, +0.21%.
But that’s not the case for economic expectations.
Philip Lawlor, head of global investment research for FTSE Russell, points out that global economic forecasts for next year haven’t changed very much. “It is highly unlikely that these forecasts are reflecting the scope of this pent up demand that could ratchet growth expectations being fed into 2021 forecasts, so I think they are yet to reflect the full vaccine impact,” he said in a presentation.
Read: World watches as first person receives Pfizer-BioNTech COVID shot
In a note to clients, Jan Hatzius of Goldman Sachs made a similar point. The bank’s global growth forecast for 2021 is a full percentage point ahead of the consensus, at 6.2%, and its 2022 forecast of 4.5% growth is above consensus by a half-point. That disparity is similar for its U.S. estimate as well.
“Most recent recessions have resulted from asset price busts and other financial shocks, whose negative effects on output took time to develop and even more time to unwind. By contrast, the 2020 slump resulted from a health crisis, whose negative effect on output was huge and immediate but also quickly reversible,” said Hatzius.
“Some sectors that largely shut down in the spring lockdowns—e.g. auto manufacturing—have learned to keep producing even in a virus-ridden environment. Other sectors that remain depressed for now—e.g. travel and entertainment—are likely to rebound sharply once enough people are vaccinated. This is likely to trigger renewed upgrades in consensus growth forecasts.”
Lawlor said an important point of the vaccines is not simply that growth expectations rise, but also that the tail risks recede. “I think the bottom line is that rising bond yields reflect rising growth expectations. And if that was the case, that would not constitute a significant headwind for equities,” he said.
Lawlor said that could generate a fear-of-missing-out rotation trade next year. A pick-up in bond yields should encourage a rotation from quality growth stocks to the COVID-impacted value stocks and financials.
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