Worries Over New COVID Strain Dampen Vaccine, Stimulus Optimism

 | Dec 21, 2020 12:39PM ET

Well, there’s good news and bad news this morning. Let’s get the unpleasantness out of the way before looking at causes for optimism.

Coronavirus worries have ramped up over a new strain of COVID-19 that seems to spread faster. In response, European governments have ratcheted up restrictions designed to stem the spread of infections but that also pose economic risks, helping to send European shares lower overnight.

Those worries spilled into premarket trading in the U.S. as the familiar concern about the virus’ effect on the economy comes back to the fore, and travel-related stocks are taking it on the chin. Investors are seeking the relative safety of U.S. government debt and the dollar and shunning riskier assets like oil. Gold, typically a safe-haven play as well, was down because of the higher dollar. Wall Street’s main fear gauge, the Cboe Volatility Index (VIX) was up nearly 40% at one point.

The rise in the greenback was particularly acute due to the new restrictions in Europe—especially in Britain, as fresh lockdowns come amid a looming Brexit deadline, with key details yet to be finalized. As Britain pulls inward, the likelihood of a “no-deal” departure from the European Union at the end of the month becomes more likely.

Maybe More Than Silver Linings/h2

But not all was doom and gloom, as there has been some good news that currently is getting overshadowed by the virus fears.

On Sunday, Congress struck a deal on a $900-billion coronavirus stimulus bill that, if passed, will involve direct payments and jobless help for Main Street. Wall Street has been hoping for such a measure for a while, with the thinking that stimulus could help boost consumer spending and give the economic recovery a shot in the arm.

Speaking of shots in the arm, immunizations with the Moderna (NASDAQ:MRNA) vaccine were expected to start today after the Food and Drug Administration authorized it for emergency use on Friday. This second emergency COVID-19 vaccine received the emergency go-ahead a week after one developed by Pfizer (NYSE:PFE) and BioNTech (NASDAQ:BNTX).

The two vaccines that are reported to be highly effective seem to offer a light at the end of the tunnel and potential closure on a tragic chapter in world history. But it’s important to remember that the vaccines won’t be available for widespread use for some time, meaning countries in the northern hemisphere will likely have to endure more hardship—and ratcheted-up government efforts to curb the spread—during the coldest months of the year.

Still, the hope on Wall Street has been that a vaccine, once widespread, will help boost consumer spending and increase the pace of the economic recovery.

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After the good news on the vaccine and stimulus fronts, equity index futures actually opened higher on Sunday before succumbing to worries about the new UK virus strain, indicating that there is some positive sentiment underneath the fear.

Electric Week/h2

It remains to be seen how long the current selling will last. In addition to worries about the new strain, there could be some pressure on equities heading into the end of the year from profit taking. But there could also be a buy-the-dip mentality that could end up supporting the market and helping the Santa Claus rally from last week continue.

If you ducked out early, here’s where we ended: U.S. indices ended in the red Friday as stimulus talks dragged on but pared their losses into the close on stimulus-related optimism.

Friday was also (NASDAQ:TSLA) .

Although shares of the electric vehicle giant rose nearly 6% and hit a record high Friday amid trading related to its inclusion in the S&P 500 Index, they were more than 4% lower ahead of the open. TSLA is the largest single-company addition to the broad index, and funds that track the benchmark have had to add billions of dollars in that stock and sell an equivalent amount in other stocks in the index.

The entry of TSLA into the SPX also will likely have ripple effects for the average investor. Anybody who couldn’t buy the stock can now own some of it by investing in the SPX. TSLA enters the SPX with a nearly 1.7% weighting and a position as the fifth largest company in the index by market cap—even ahead of Google parent Alphabet (NASDAQ:GOOGL). When you combine its size with its history of volatility, TSLA could help make the SPX more volatile.

The economic calendar is relatively light this week. Higher profile data releases include December consumer confidence figures as well as existing home sales data, personal consumption expenditures numbers, and a new home sales report for November. As always during the pandemic, investors will also probably be tuning in to the weekly initial jobless claims report to take the pulse of the labor market, an important indicator for the pace of the economic recovery.