After opining last week that the U.S. is likely halfway to Covid-19 herd immunity, Columbia Threadneedle analysts now see even more reason for optimism.
That’s what equity research analysts Kosta Kleyman, who focuses on biotechnology, and Chris Vandergrift, who focuses on payments and ecommerce, told Financial Advisor as a new vaccine from Johnson and Johnson was given emergency approval by the FDA, President Joe Biden accelerated the rollout of vaccinations, and Texas and Mississippi relaxed their coronavirus restrictions.
“We’ve only just started vaccinating a very narrow population, we’ve been having to cherry-pick rather than really open up the floodgates to vaccines,” said Kleyman. “We’re on the cusp of opening up the floodgates to anyone and everyone who wants it.”
For Kleyman, who wrote the opinion piece arguing that the U.S. is halfway to herd immunity, the speed of vaccine uptake is the main reason for optimism. He explained that his outlook was based on estimates that over 30% of people in the U.S. has already contracted the virus and recovered from it, and about 15% of the population has received at least one dose of an existing vaccine. “Once the floodgates open, we’ll go from 15% very quickly up to 60% or so by the end of the second quarter—that’s June.”
Columbia Threadneedle is placing the herd immunity threshold at 70% of the population, which is somewhat lower than projections by public health officials like White House advisor Dr. Anthony Fauci, who has pegged herd immunity at 85% of the population, and others who have said that as much as 90% of the population might need to be immune to finally stop Covid-19’s spread.
But Kleyman points out that the acceleration of vaccinations from this point onward will be dramatic. “The JNJ vaccine, just approved, is a much easier vaccine to distribute and administer,” he said. “It’s just one dosage, and in terms of storage, it just needs to be refrigerated. Add to that that Merck is supplementing the vaccine, and we’re going to be moving a lot quicker than we have over the past two-and-a-half months.”
After Johnson & Johnson, there may be two more vaccines with emergency approval in the U.S. by the end of May, from AstraZenaca and Novavax.
Economically speaking, that means it may not be too soon to gradually roll back some virus related restrictions, the analysts said.
“The initial view is that people are starting to feel comfortable that a lot of the population is getting vaccinated and case counts are going down precipitously,” said Kleyman. “We’re already at pre-winter surge levels, and the case numbers might be falling further. Those factors make herd immunity in the second quarter very plausible.”
One remaining risk that could prolong the path to herd immunity is the presence of variants from the U.K., South Africa and Brazil, against which the current vaccines have lower levels of effectiveness. The longer the virus circulates, the greater the chance for the emergence of more dangerous and more vaccine-resistant variants.
Also of concern to Kleyman is that people who recover from other strains of Covid-19 may still be susceptible to South Africa’s variant. “These variants do have some impact on the efficacy of the vaccines, and the South Africa variant is of course worrying,” he said. “The question is how quickly can we reduce the spread of the virus to the point where it’s minimal—at this point, those who have already been ill, or who received the vaccine and feel protected are potentially still at risk.”
A third issue that could stymie the return to normalcy in the U.S. is the spread of the virus and the pace of vaccinations in the rest of the world.
Nevertheless, he believes that the U.S. is likely to reach pre-pandemic levels of illness around this summer.
A faster pandemic recovery means a stronger, more accelerated economic recovery, especially among consumers, said Vandergrift. “The consumer balance sheet is healthy, but there’s still pent-up demand,” he said. “This is a human crisis, not an economic crisis. In traditional recessions, there’s a restraint on demand due to lack of income, but for the aggregate consumer in this case, that’s not true. Personal income is healthy.”
To date, after an initial shock and rapid partial recovery in the late spring of last year, the U.S. economy’s return to normal, as measured by Columbia Threadneedle’s Return-to-Normal Index, has stalled. Even the vaccine rollout has yet to move the needle, because to date, most of those who have been fully vaccinated are essential workers, who never had the option of working from home, immune-compromised and infirmed Americans, whose economic activity was already restricted, and the elderly.
Vandergrift expects that to change with the expansion of vaccinations and a return to warmer weather. “There’s $1.4 trillion in excess savings that could be spent,” he said. “There’s a lot of desire to get out and go spend, so if the forecast is accurate that we’re going to reach herd immunity, restrictions will be lifted and an unbelievable wave of demand is going to return to restaurants, travel and entertainment this summer. That’s what we’re forecasting.”
Lagging areas of recovery are likely to remain around business, as offices will be slower to open than leisure, entertainment, restaurants, retail and schools, said Vandergrift. Business travel is likely to remain suppressed.
While there may be more online shopping or “omni-channel” consumer activity, Vandergrift expects foot traffic for brick-and-mortar retail and entertainment to return to pre-pandemic levels under Columbia Threadneedle’s scenario. He’s based those assumptions off of the pace of the return to normalcy in areas that have successfully constrained the virus’s spread, like Israel and Hong Kong.
Because of the speed of the economic and market recovery, there isn’t likely to be long-term financial damage, said Vandergrift, making broad fiscal stimulus unnecessary. In some ways, it wasn’t a major impact at all, he said, explaining that up to 70% of the U.S. economy was only affected in “very limited” ways by the virus.
Vandergrift particularly questioned the need for $1,400 stimulus checks for such a broad swath of Americans.
“We don’t need so much of this fiscal stimulus, we need extremely targeted stimulus at the consumers and businesses in highly impacted verticals,” he said. “We don’t need a $1.9 trillion stimulus package right now that delivers $1,400 to almost every consumer. In aggregate, the average consumer is very healthy, their savings are up, and their revolving credit is down. They don’t need this.”
Kleyman added that there is still little known about the persistence of protection against the virus—while those who recover from Covid-19 seem to have at least several months of immunity, the immunity imparted by vaccines appears to be much stronger and longer-lasting.
However, if the virus is successfully slowed and minimized by this summer, the U.S. and other developed nations will have established the production and infrastructure necessary to continue to effectively battle the virus, including new strains and pop-up outbreaks around the world, said Kleyman.
“In the coming months, we’ll figure out the [level of necessary] protection, and it will serve as a guide for us to understand how and how often we need to be vaccinated. Do we need more booster shots? If we’ve received the original vaccines, do we now need another with broader protection against other variants?” he said. “We’ll have that over the next couple of quarters, and we’ll be able to manufacture and distribute these additional vaccines, if necessary, in a matter of months. The FDA has already received guidance to approve a second generation of vaccines much quicker than this first generation.”