Widespread testing & treatment for COVID-19 will kickstart the economy

For reviving the U.S. economy, investors are pinning their hopes for wider availability of testing for COVID-19 along with drug trials; until there is some concrete progress in these areas stock market gains are likely to be limited.

The S&P 500’s nearly 27% gain above its March 23 low has been because of hopes that the massive fiscal and monetary support would dampen the economic blow from the lockdowns that are in place to check the spread of the coronavirus.

Recently the index also reacted to trials, especially that of Gilead Science’s remdesivir experimental treatment for COVID-19 which has shown promise. Remdesivir, which previously failed as a treatment for Ebola, is designed to keep a virus from replicating and overwhelming a patient’s immune system.

The volatility underscores investor’s impatience on when state and Federal authorities might start to ease lockdown orders which will bring a sense of normalcy in the workplace.

So far, there has not been any proven vaccine or effective treatment for the disease which has infected 928,000 people globally and killed more than 52,000 people in the U.S. alone and 190,000 people globally, according to the latest data from the U.S. Centers for Disease Control and Prevention.

“Any sentiment around a therapy is really moving markets because it shapes expectations for a return to normalcy which would be needed to get an economic recovery started,” said Shawn Cruz, manager of trader strategy at TD Ameritrade in Jersey City, New Jersey.

On Friday, the S&P added gains after the lead investigator in a U.S. government trial of remdesivir disclosed that the trial may yield results as early as mid-May.

Investors have also been encouraged on April 17 after medical news publication STAT reported rapid improvements in COVID-19 patients in one hospital studying the drug. Although Michael O’Rourke, chief market strategist at JonesTrading in Stamford, Connecticut is encouraged by the number of researchers working on coronavirus treatments, he is cautious about the stock market’s near-term prospects.

“The only thing that pushes us above this range in a sustainable way is a therapeutic solution or a vaccine that allows us to return to the pre-crisis level of business,” said O’Rourke. “I think we’ll get a medical solution. The big question is the time frame. The longer it takes it becomes harder (for the economy) to snap back and rebound.”

Although there are around 70 vaccines in various stages of development for the Wuhan coronavirus, Manulife Investment Management’s Steven Slaughter, who manages a roughly $3.5 billion dedicated healthcare fund, opines a successful vaccine will take at least 12-18 months compared to the average vaccine development time of 5 to 7 years. Then pharmaceutical companies will have to produce enough vaccines to cover the entire’s globe’s population.

There are four main types of treatments which are being tested by companies including Gilead, Regeneron Pharmaceuticals, Takeda Pharmaceutical, and Alexion Pharmaceuticals which hold some promise. Although treatments may not necessarily act as a brake against the transmission of the disease, they could help doctors control the severity of infections, and thus ease pressure on intensive care units (ICU).

“If we can take a patient that otherwise would’ve spend 2-3 weeks in an ICU bed out of that ICU bed in 2-3 days that has an enormous beneficial impact on our ability to handle outbreaks or to handle a potential second wave of infections,” said Slaughter.

“What will be more critical will be the testing capacity and the efficacy of track and trace programmes,” said Salman Ahmed, chief investment strategist at Lombard Odier Investment Management.

Test developers include Roche Holding and Abbott Laboratories.

With much of the U.S. population in lockdowns, many businesses have been put on pause since the middle of March, and thus investors are expecting dismal earnings as well as a significant decline in the U.S. economic growth during the second quarter.

The third quarter activity is likely to be very different from the above scenario, and recent S&P gains imply a huge improvement in the economy during this third quarter, said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia.

“There will be a vaccine and treatments for COVID-19 but people are underestimating the amount of time it takes for them to reach the market,” said Tuz. “If there are disappointments in three areas – vaccine, treatment and testing – we could back track some in the market.”

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