Goldman Sachs thinks markets underpricing odds for Covid-19 vaccine before year end

(Sharecast News) - Goldman Sachs thinks the world will be in a very different place in three months' time on at least three front, so much so that investors' expectations for the outcomes will likely set the tone for trading until then.
For starters, it will be known what impact the return to schools has had on Covid-19 outbreaks, and the presidential elections will be in the rear view mirror.

Thirdly, the investment bank said, there was "also a good chance that we will be on the verge of approval of a COVID vaccine by that time."

While the range of potential outcomes was "wide", it had the most conviction in its call for continued US dollar weakness.

Nevertheless, they also believed that options markets were "underpricing the upside for equity indices from an early vaccine."

"Shifts around vaccine news and the election may also challenge the market's assumptions about growth and persistently negative real rates, and could prompt renewed rotation towards traditional cyclicals, steeper curves, and outperformance in EM (especially North Asian) FX and equities."

"We suspect that it is still too early to position aggressively for that shift, but think that options exposure in some of these areas may already make sense."

"While the virus picture remains mixed, the news on vaccines has been promising," they continued.

To back up its thesis, Goldman pointed out how in early June the "superforecasters" at Good Judgement saw just a 10% probability that a vaccine could be "broadly available" by the end of the first quarter 2021.

Now, Goldman said, they put the chances of such an event at 40%.

"We agree that there is now a good chance that at least one vaccine will be FDA-approved by the end of November and broadly distributed by the middle of 2021.

"This kind of timeline could see a substantial boost to GDP relative to a 'no-vaccine' case, particularly for the US, which is likely to lead the vaccine race and is likely to experience worse outcomes than in Europe without a vaccine."

Together with the fall in real interest rate yields, those improved odds for an early vaccine was why US stocks were making new highs, Goldman said.

Should an 'early vaccine' materialise, they argued that could be consistent with the S&P 500 at around 3,700 points, while in a downside case (20% odds) "from a more significant reversal in activity from a 'second wave' in the US, it could fall to a little below 2,200.