Back in February we featured COVID-19 risks to markets and wondered why the market did not care much. The fear of missing out based on Fed liquidity feeding markets was a significant factor. We look at the hope for a vaccine today and wonder how exuberant the market is to get beyond COVID-19 backed by Fed liquidity and the fear of missing out.

The timeline for expectations is in the chart. We should know prior to the US election if we will have a viable vaccine. Some say the market will explode to the upside when we start to see efficacy results from the phase 3 trials. That is a possibility, but the amount one is paying for the market today is already extreme and the reality is that it will take years to normalize economic output to pre Covid levels even with a vaccine or viral treatments. This will likely be a drag on earnings for a few years. Despite the timing of the efficacy results, A LOT OF THIS EXPECTATION IS PRICED IN.

Those that say it’s not the markets are not expensive are the ones comparing the value to the yield from safe government debt that central banks tell us will be anchored to as low as it needs to be to keep the world growing. THAT IS NOT BULLISH, IT’S FRIGHTENING. But this is the new normal and the liquidity factor is significant. I can’t emphasize enough that it’s not good that we need free money to keep the party going. That said, AAPL, AMZN, NFLX, GOOGL, MSFT (and FB, though I’m not a big fan) that make our lives easier and more efficient and are working well in the new normal, face various tax and anti-trust headwinds going forwards. When the market starts to care is a topic for another day perhaps. These risks accelerate if we get a changing of the guard in Washington DC.

The top people in the space, that I trust, think that efficacy will tell us if this is going to be with us forever as part of life or whether we can develop immunity. Here is where the seasonal flu argument is somewhat rational. We are also just learning about the long-term damage COVID-19 is having on many people—you don’t want to get it for the simple fact that you may have the genetic risk that causes other longer-term issues. Dr. Fauci told us this week that we may have a viable vaccine by election day. But this will only work, much like wearing masks, if enough people take it and enough people have a good immunity response. Basically, by not wearing a mask and doing your part, you are guilty of making this far worse than it needs to be. That will likely be truer when it comes to a vaccine. And if you think the people who will not wear masks will take a vaccine, well there’s a bet to make there too I would think.

The other what if uncertainty the market is not paying much if any attention to is the probability of a Democratic sweep in the elections that will no doubt be challenged in a new reality TV show starring you know who and played each night on the six o’clock news. The high hurdle for the Dems is not the White House, it’s the Senate. They need to win 3 seats if they are going to take control if they win the White House. Arizona seems like a lost GOP seat for sure, CO, MT, MA, GA and IA are the key races to focus on.  I expect a Dem sweep is the most likely outcome in November, but that is the minority view from a market risk perspective. Not because I want a more socialist society, not because I think it is the best outcome for the US market and economy, but because that’s what my analysis suggests. I predicted Trump would win in 2016 when all the polls said he would not. I predict a Democratic sweep because that’s what the average person needs when push comes to shove and Trump did not make America great. Addressing inequality issues will!

For me, the biggest economic issue is inequality. Trump’s policies have made it far worse. Policies to boost the stock market is not what society needs most. I’m not saying the push towards more Left politically is good, I lean right politically and am a small government fiscal conservative, but it has a better chance of lifting the bottom half up and that’s what society needs and will likely vote for. Which matters most for markets will be debated in the coming months. Some think the money printing and unprecedented spending and liquidity are what matters most. It matters a lot and it is inspiring a FOMO (fear of missing out melt-up). I have not seen market sentiment so negative after a market rally like this ever in all the data I’ve looked at. But then again, we’ve never had a global pandemic and a printing press working at the same time.

More volatility to come is a virtual certainty.

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