Category: Chart of the Week

Russell Rebalance: What Happened?

Summer has arrived and with it comes the annual “Russell Rebalance,” or as FTSE Russell — the index administrator — officially calls it, the Russell Reconstitution. The last Friday in June brings a unique set of challenges for investors managing to one of Russell’s many indices. More than half of U.S. equity investment managers benchmark to a FTSE Russell Index and the Russell rebalance affects an estimated $9 trillion across these products.¹ The entire family of Russell U.S. indices is recast to reflect changes in the U.S. equity markets over the preceding year. Essentially, the rebalance resets market cap weightings and style designations, which ultimately drive shifts in the underlying sector distributions. This creates one of the highest trade-volume days of the year.

The market’s appreciation over the longest bull market in history pushed the market cap breakpoint between the asset classes to a peak in 2018 of $3.7 billion. As a result, the market cap threshold for constituents to be placed into either the large- and mid-cap focused Russell 1000 Index or the small-cap focused Russell 2000 Index has grown 150% since the Great Financial Crisis.

This past Friday, June 26th, marked the official reconstitution day. Notable movements in this year’s rebalance revolved around a few key sectors: Financials, Health Care, Industrials, and Information Technology. The Russell 1000 saw little movement in sector allocation, while the respective style indices, the Russell 1000 Growth and Value benchmarks, experienced the brunt of change. Technology now comprises a record 43% of the Russell 1000 Growth Index, a 2.3% rise, while the Industrials allocation fell to 4.6%, from 7.3%. The Russell 1000 Value Index was the recipient of those Industrials companies, rising from 9.6% to 12.4%.

From a market cap perspective, many banks within the Russell 1000 Financials sector moved to the small-cap index as investors sold economically sensitive stocks in the first quarter of the year. The Russell 2000 Index saw a 1.6% increase to the sector, bringing the total weight in Financials to 16.2%. As expected, many of these banks qualified for the Russell 2000 Value Index, which now has a nearly 29% weight to the sector. Likely the largest hurdle for active managers navigating the rebalance is the increased allocation to Biotechnology, an industry within the Health Care sector. These securities, many of which do not make money and have no established products, go against the investment philosophies of many fundamentally driven active managers. The Russell 2000 Growth Index now has a more than an 18% allocation to the industry. As managers settle into their new benchmarks, it will be pertinent to discuss these sectoral and capitalization changes in the context of future performance expectations.

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¹ FTSE Russell

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Private Equity in Times of Crisis

While there is still much uncertainty around the long-term economic ramifications of COVID-19, financial markets have been undergoing frequent massive swings as both investment managers and allocators evaluate the situation and what it might mean for their current and future investments. Given the illiquid and slow-moving nature of private equity investments, an outstanding question is: What will this mean for private market investors?

One principle which people took serious note of in the last crisis was something called the “denominator effect.” A decline in the value of one asset should result in other assets being sold to properly rebalance a portfolio, but many assets like venture capital (“VC”), private equity (“PE”), and others can be quite hard to sell in the short-to-medium term, leaving LPs overallocated to private markets. When the stock market falls dramatically, public market investments fall in value immediately; however, private market investments do not reflect the changing environment right away because they require a manual valuation process that is one to two quarters behind public markets.

In addition, LPs allocating to PE and VC can expect net cash flows to turn negative, a break from the norm of recent years when distributions outpaced contributions, which led to positive net cash flows. During a time of crisis, GPs dislike realizing investments at diminished valuations. Instead, they tend to further invest into existing portfolio companies, or at least hold those companies longer, which leads to reduced distributions. Furthermore, GPs also tend to call down capital more slowly during times of market crisis because deal-making slows substantially. It is forecasted that it will take months, possibly even until the end of the year for transaction volumes to rebound.

The exact repercussions the crisis will have on PE fund performance will remain unknown until we know how deeply the virus will affect global economies. However, we do believe private markets will fare well in the current market environment. Research indicates that while PE exhibits high correlation with public market performance over longer periods of time, in times of volatility it tends to drop less and subsequently outperform. Funds deploying cash through the crisis are in a favorable position to deliver elevated returns given the higher likelihood of finding a bargain in a crisis. Previous crisis funds, such as 2001 or 2009 vintages, posted top-tier metrics; the hope is that this pandemic is consistent with these previous patterns for private equity returns.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The Stock Market vs. Trump

Though it has so far taken somewhat of a backseat to the COVID-19 pandemic and global protests for racial justice, 2020 is a U.S. presidential election year. As can be seen in the chart, over the last year and the last several months in particular, the S&P 500 has generally moved in line with expectations for Trump’s reelection this November.¹ As the complicated debate over whether the stock market performs better under a Republican or Democratic president continues, the historical numbers show that the market does notably better in an election year when a Republican wins the seat. While there are always many moving pieces, this makes sense, as Republicans are often considered more pro-business and pro-market than Democrats.

Now into June, that correlation has completely reversed. The S&P 500 has continued its recovery, getting back to flat on the year before last Thursday’s correction, while chances of a 2020 Republican victory have hit new lows. Though based on only two weeks of data — and with another almost five months until the election — it is an interesting departure from historical trends. Voters certainly have a lot to grapple with over the next several months and we will continue to follow all developments closely as history is made.

Print PDF > The Stock Market vs. Trump

¹As measured by data from political betting site PredictIt: “Which party will win the 2020 U.S. presidential election?”

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Did Friday’s Jobs Report Overstate the Labor Market Recovery?

On Friday, the U.S. Bureau of Labor Statistics released its employment report for the month of May. To the surprise of many, the economy added 2.5 million jobs during the month, which was a sharp contrast from the projected figure of 8.3 million job losses. Not surprisingly, the unemployment rate dropped from April’s 14.7% figure to 13.3% for May; economists had predicted that May’s unemployment rate would be 19.5%. These unexpected data points have further fueled the equity market rally with the S&P 500 returning 2.6% on Friday when the report was released, and it has continued its upward trajectory into this week as well. Furthermore, Treasury yields have risen based on optimism about economies re-opening and the presumption that the worst is behind us from an economic bottoming perspective. Markets are forward-looking and appear to be pricing in further recovery as 2020 progresses. The stimulus policies and limited re-openings seem to have had an early effect and the data may suggest that the damage was not as deep as expected. However, despite the positive sentiment about the jobs report, there is some concern that a classification anomaly for job losses may have inflated Friday’s numbers.

More specifically, the report had a misclassification issue where employees who were temporarily laid-off were considered employed. If corrected, the unemployment rate should be 3% higher. Additionally, the data collection for the report was through the first week of May and further job losses and lay-offs for the remainder of the month were not addressed.

Compared to the trends from March and April, the reported figures are moving in the right direction, even though this classification issue makes the numbers from Friday appear a bit more optimistic than reality. Ultimately, the unemployment rate is the highest since the Great Recession and recovered payrolls are only about 10% of those that were wiped out during the pandemic. So while the data shows that the market is heading in the right direction, it is too early to make conclusive decisions about the state of recovery until we see a more sustained pattern of job creation and economic growth.

Print PDF > Did Friday’s Jobs Report Overstate the Labor Market Recovery?

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Is the Worst Behind Us?

The 10-year Treasury yield broke through a key threshold yesterday closing at 0.77%, its highest in eight weeks, and ending at the same 0.77% that it closed at on April 8th. As shown in this week’s chart, the yield curve has been steepening substantially since March 9th, when the 10-year closed at its all-time low of 0.54%. This steepening may be a sign from the bond markets that the worst might be behind us.

On the economic front, Automatic Data Processing released data yesterday that showed the private sector lost only 2.76 million jobs in May, far below the 8.75 million forecasted by economists, and also far below the 19.56 million private sector jobs that were lost in April. This welcome news was amplified by National Institute for Allergy and Infectious Diseases Director Dr. Anthony Fauci’s remark that Moderna’s COVID-19 vaccine candidate is likely on-track to start Phase III human trials in July. Additionally, he noted that the plan is to begin manufacturing doses of the vaccine in tandem with the trials so that potentially 100 million doses are available to be shipped by November or December. Collectively, these favorable developments sent the S&P 500 up 1.36% and the 10-year Treasury yield from 0.68% to 0.77% yesterday, steepening the yield curve. As such, the fixed income and equity markets are finally exhibiting normal correlations, as a steepening curve with a rallying stock market signifies investors selling down long-dated Treasury bonds to buy stocks. This is in contrast with the March cash dash that sent rates down while the curve steepened all the while the stock markets fell as investors sold off both stocks and bonds to raise cash.

Also shown in our chart are the projected Treasury yield curves for the end of this year and the next two years based on the Treasury forwards market. They show the yield curve continuing to rise and steepen, with the 10-year forecasted to rise to 0.85% at the end of this year, 1.02% at the end of next year, and 1.18% at the end of 2022. While Treasury forwards will continue to fluctuate and the 10-year cannot be expected to reach these projected yields exactly, the expected steepening shows that the bond markets are expressing some level of optimism for the future given these recent positive developments. Ultimately, we see these developments as a positive sign that the economy, markets, and pandemic are progressing towards recovery.

Print PDF > Is the Worst Behind Us?

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The Confluence of Small-Cap Stocks and the Economy

Small businesses are often thought of as the backbone of the U.S. economy. Long before the coronavirus, the Russell 2000 index, which tracks the performance of domestic small-cap companies, peaked at the end of August 2018. A warning sign of a slowing economy struck at the same time, with the peaking of the ISM Manufacturing Index (PMI), a gauge of domestic manufacturing activity. The tandem crest of these two indices is not too surprising as smaller companies that make inputs or provide services for larger entities are typically squeezed first when the going gets tough. Over the long-term, small-cap returns have shown a higher correlation with domestic manufacturing activity relative to mid- and large-cap returns. Despite the peak of these two indices, the S&P 500 Index, which tracks the performance of domestic large-cap companies, went on to return 16.7% from August of 2018 to its height in February of this year; small-cap returns were flat to negative over the same period. During the worst of the market decline, the Russell 2000 was down 44.1%, underperforming the S&P 500 by nearly 10%, and the PMI hit 41.5, a level not seen since the depths of the Global Financial Crisis. What explains the performance differential between these market cap indices and given the close relation to the PMI, what can we expect from small-cap stocks going forward?

Relative to large-cap, the performance gap lies in quality and construction. Many small companies in the index have low cash reserves, no profits, and debt-laden balance sheets. A lack of access to capital pushes small-cap companies to issue debt at higher rates, creating a lower threshold for quality. Additionally, the small-cap index is more cyclical in nature with a 15% total differential between sectors like interest rate sensitive financials and REITs, as well as economically sensitive industrials. Given this, we might expect the asset class to underperform in the twilight of the longest bull market in U.S. history. Secondarily, the small-cap index has broader sector and industry exposure than the S&P 500. As a result, the closure of the U.S. economy may prove detrimental for many smaller-sized businesses.

In evaluating the last two recessions, there is no consistency as to when the PMI will trough. However, U.S. small-cap returns tend to rebound after a trough in the PMI. Investors like to see a strengthening of the economy prior to betting on small-cap. Looking forward, small-cap stocks usually have better relative performance to their large-cap peers coming out of a recession. The Russell 2000 outperformed the S&P 500 in the last two recessions over the one- and two-year periods post-trough by an average of 26% and 94%, respectively. It is possible we are already starting to see a rebound in small-caps. As of May 26th, the Russell 2000 has outperformed the S&P 500 by nearly 5% month-to-date, the majority of which has accrued over the last week. Small-cap stocks have rebounded on broader containment, economic reopening, and optimism around vaccine development. As is true in every economic downturn, the players here are different; the insurgence of COVID-19 has created an unprecedented headwind for the economically sensitive Russell 2000 Index. Predicting sentiment changes is impractical at best, but as the U.S. consumer economy reopens, we hope to see falling unemployment, rising consumer confidence, and a bottoming of the PMI as domestic production ramps up.

Print PDF > The Confluence of Small-Cap Stocks and the Economy

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

There’s FAAMG and Everyone Else

Since the S&P 500 bottomed on March 23rd, the stock market has taken off while economic fundamentals have worsened. As of May 15th, the S&P 500 was up 28.4% from its trough while unemployment stands at 14.7%, April retail sales fell 16.4%, and industrial activity dropped by 15.5%. The S&P 500 has recouped more than 50% of its losses and sits just 15% below its all-time high.

Digging deeper into the underlying performance of the market, it becomes evident that not all of Wall Street has participated in the rebound. Market breadth, which compares the number of stocks that have gained relative to the ones that have declined, has been especially narrow. As a result, the market can be separated into a relatively few “Haves” and many “Have Nots.” The “Haves” are the largest five companies in the S&P 500: Facebook, Apple, Amazon, Microsoft, and Google (FAAMG) and the “Have Nots” are the other 495 companies in the index. Year-to-date as of May 15, 2020, the top five stocks returned 11.8% and outperformed the bottom 495 stocks before, during, and after the market decline. The bottom 495 stocks returned -15.3% year-to-date, representing a 27% performance gap. This leads us to two questions: Is the market rebound warranted? And, will the performance dispersion between the “Haves” and “Have Nots” fade anytime soon?

Equity markets are a forward-looking indicator of economic and corporate conditions. Yes, current fundamentals are not good, but analysts expect economic growth and corporate earnings to rebound later this year and into 2021, along with the development and release of a vaccine that can eradicate further outbreaks of COVID-19. In addition, stock markets often trough before the release of the worst economic data and before recessions end. Therefore, the forward-looking nature of the market seems to justify the market rebound to date.

Regarding the “Haves” and “Have Nots”, the market seems to believe the winners are large Technology companies and the losers are everyone else and/or any company exposed to COVID-19. There is fundamental support to favoring FAAMG. For example, Microsoft reported a 15% increase in sales, Google surpassed revenue expectations despite the potential for a decrease in advertising sales, and Apple has one of the most cash-rich balance sheets in the country. So, it is plausible that these stocks can continue to outperform. The longest period of similarly narrow breadth occurred in the two-plus years leading up to the bursting of the Tech Bubble. Consequently, periods of narrow breadth are often a harbinger of market declines and have “signaled below-average 1-, 3-, and 6-month S&P 500 returns as well as larger-than-average prospective drawdowns.”¹ We know that eventually the other 495 stocks in the S&P 500 will have more attractive fundamentals and will command higher prices. At that point, the return dispersion between the “Haves” and “Have Nots” will normalize, we just do not know when, though it will likely coincide with more positive economic data and greater containment of the coronavirus pandemic.

Print PDF > There’s FAAMG and Everyone Else

¹ Goldman Sachs Portfolio Strategy Research, May 1, 2020. “U.S. Weekly Kickstart.”

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

It’s Not Bad News for All Energy Stocks

With the steady stream of negative economic data, record-shattering unemployment figures, and ballooning government deficits, it has been hard to reconcile whether there is light at the end of the COVID-19 tunnel. This is coupled with the markets’ shrug-off of these gloomy figures, thus far, as we see daily green-shoots. The general expectation that we have a tough slog ahead until a vaccine is widely available has led some investors to “wait it out” on the sidelines.

This week’s chart brings attention to a flickering bright spot for investors, society, and the planet at large: the resiliency and relative outperformance of clean energy during this pandemic. The energy sector has been rocked by limited demand (due to the broad economic shutdown) and an oversupply of crude oil (caused by OPEC and Russia locking horns on price). And as shown, the global energy sector has careened downward, posting a YTD return of -37.1% through May 12th. However, if we include only those companies that embrace alternative energy, one can see that they not only have outperformed their oil-dependent peers but have also outpaced the broader market, posting -5.1% YTD return. These renewable energy and infrastructure producers are benefitting from increased demand, technological innovation, lower cost of capital, and potential expansion of tax credits (for wind and solar power), while not having their chief input dictated by oil price fluctuations.

While it would be irrational to believe that the world will unanimously cut oil consumption and usage immediately post pandemic, there are compelling arguments that our “new normal” will be more accepting of electric grid expansion and increased usage of renewable energy sources. In the U.S., we are likely still in the early innings of a multi-decade energy disruption, while developed countries within Europe and Canada are approaching the seventh inning stretch. The clean energy sector, which has been touted by the environmentally conscious crowd for years, is showing a level of resiliency that all investors should take note of.

Print PDF > It’s Not Bad News for All Energy Stocks

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Declining Jobless Claims When Unemployment is 14.7%?

New jobless claims fell from a peak of 6.9 million for the week ending March 27th to 3.2 million for the week ending May 1st (according to data released yesterday, May 7th), shown in the left chart. However, the measure remains at an extraordinarily high level due to the devastating impact of the COVID-19 pandemic. In contrast, the highest that claims reached during the Global Financial Crisis (“GFC”) was only 665,000 for the week ending March 27th, 2009. Since the middle of March this year when the nationwide lockdowns began, there have been 33 million new jobless claims in total. In just one and a half months, we are already closing in on the 50 million new claims that were processed in the two years spanning all of 2008 and 2009 for the GFC.

To pour more salt on the wound, jobless claims underestimate unemployment as the measure does not count individuals who are not working and have not yet filed a claim. In contrast, the unemployment rate is based on household surveys and counts those who are not working even if they have not filed an unemployment claim. The unemployment rate reached a shocking 14.7% at the end of April (data that was just released today, May 8th), also shown in the left chart. This rate, which translates to 20.5 million¹ American jobs lost in just the month of April alone, is not as high as the consensus forecast of 16% nor the 25% reached in 1933 during the Great Depression but is well above the 10% peak unemployment rate reached during the GFC in October of 2009. Yesterday the S&P 500 gained 1% while the 10-year Treasury fell from 0.72% to 0.63%; this morning the S&P 500 is up roughly 1% just after the opening bell.

From a bigger picture perspective, what is the outlook for the economy and employment? As new COVID-19 infections have started to decline in many regions of the developed world, we expect governments to continue experimenting with reopening. Further volatility is likely as there may be bouts of rising new infections followed by reclosures and resumed openings until governments, businesses, and households establish an interim balance for returning to workplaces, restaurants, and stores while still keeping the spread of the virus at bay. Meanwhile, vaccine, antiviral, and antibody development appears to be on a positive trajectory. The FDA approved Moderna’s coronavirus vaccine for Phase II trials yesterday, which means that there are two candidates now in Phase II, with Phase III potentially within reach in the second half of this year. Some of the other 70 vaccine candidates have also shown promise and are set to enter Phase I in the coming weeks. Moreover, government stimulus remains steadfast.

Nonetheless, the damage from the shelter-in-place orders to the U.S. consumer has been immediate and that rapidity has also been felt in the energy sector, shown in the sharp decline in active oil drilling rigs in the right chart. But U.S. corporations across the broader spectrum have generally held up well as many have strong balance sheets to sustain a prolonged recession. We are seeing the beginnings of more serious damage for U.S. corporations, however, as the Bloomberg bankruptcy index — a measure of both the number of and dollar amount of bankruptcies — is just starting to rise, also shown in the right chart. The recent bankruptcies of Neiman Marcus and J. Crew hint at more coronavirus casualties to come. Both companies filed for Chapter 11 restructuring, rather than Chapter 7 liquidation, so there may be potential for re-emergence depending on how long this coronavirus crisis lasts.

Despite the rise in bankruptcies, the gradual reopening of various economies coupled with encouraging vaccine progress and government stimulus has driven the equity markets higher since March, and spreads have generally tightened across fixed income sectors. All things considered, we expect volatility to remain elevated but equity and credit markets to continue their gradual recovery. However, we remain diligent about key risks, particularly a second wave of infections later this year and swelling U.S.-China tensions. Weekly jobless claims and the unemployment rate will likely remain high while rig counts remain low until the economy begins to open up more broadly. A current working paper by economists at the Federal Reserve Bank of San Francisco forecasts a worst-case scenario wherein if progress is not made and a burst of hiring later in 2020 and in 2021 does not materialize then double-digit unemployment may still be expected through 2021. However, they estimate that if the lockdowns are lifted and businesses hire from the large group of ready workers then by mid-next year the rate may fall back to the pre-pandemic 4%.² The bankruptcy index is a lagging indicator, however, and we would expect bankruptcies to continue to upsurge for the short to medium term even as employment, rig counts, and the markets progressively return to normal. At this point there appear to be more positive signs of a recovery than risks of worsening conditions, but much of this is predicated on further slowing of the outbreak.  Conditions are still rapidly changing and we will share updates on the market and economy as appropriate.

Print PDF > Declining Jobless Claims When Unemployment is 14.7%?

¹ This 20.5 million jobs lost figure is based on household surveys and is lower than the 33 million new jobless claims mentioned above because of any combination of the following: (1) the Paycheck Protection Program rehires as the government loans resulted in rehiring after claims were processed but before the April survey was taken, (2) standard survey error as the normal course of business from the Bureau of Labor Statistics, (3) individuals filing jobless claims while still employed.

² Petrosky-Nadeau, Nicolas, and Robert G. Valletta. May 2020. “Unemployment Paths in a Pandemic Economy,” Federal Reserve Bank of San Francisco Working Paper 2020-18. Available at https://doi.org/10.24148/wp2020-18.

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

Coronavirus Vaccines in Progress

There are currently 70 coronavirus vaccines being developed by biotech companies around the world. These charts highlight two components of this process.

The left chart shows the clinical trial phases¹ in which these 70 coronavirus vaccine candidates currently reside, with the vaccine candidate from Hong Kong Stock Exchange-listed biopharmaceutical company CanSino Biologics in Phase II, vaccine candidates from NASDAQ-listed Moderna² and NASDAQ-listed Inovio in Phase I, and the rest of the 67 candidates yet to begin Phase I. Of these other 67, notable ones include vaccine candidates from NYSE-listed Pfizer, London Stock-Exchange-listed AstraZeneca, NYSE-listed Johnson & Johnson, Euronext Paris-listed Sanofi jointly with London Stock Exchange-listed GlaxoSmithKline, and Oxford University.

The right chart shows the amount that the U.S. government has invested in coronavirus research so far, with $917 million towards vaccines, $313 million towards therapies, and $24 million towards diagnostics. The $313 million towards therapies is broken out into $152 million for Johnson & Johnson to develop an antiviral drug and $99 million to Regeneron, $25 million to Roche and $37 million to several other biotech companies to develop antibodies. The antivirals and antibodies³ will be used for treating COVID-19 patients and tide us over until a vaccine that can prevent COVID-19 can be developed and distributed.

If a coronavirus vaccine candidate passes Phase III (see endnote), the FDA will review the detailed findings of each of the three phases and approve the treatment if the FDA’s standards are met. However, the process does not stop there. The final phase involves manufacturing, production, and distribution, which may take several months to several quarters. With estimates of late 2020 to mid-2021 for distribution of a coronavirus vaccine cited by investors and the media, the current process for developing, testing, and approving these 70 coronavirus vaccine candidates is certainly on an accelerated path.

Predicting the ultimate success of any singular vaccine is utterly difficult, but with 70 diverse candidates the likelihood that at least one successful vaccine will survive the trial by fire is greater than if only a limited number of vaccines were in development. The 70 vaccine candidates all work differently but have a common trait in that they feature a delivery mechanism for the actual coronavirus spike protein, usually a weakened version of another virus. For example, Oxford University’s vaccine is based on a weakened version of the adenovirus (also known as the common cold virus) from chimpanzees. The genes of the spike protein from the actual coronavirus are spliced into this weakened virus that is altered so that it cannot replicate in humans. This modified virus serves as the vaccine that is injected into the person. Once in cells, this modified virus manufactures the coronavirus spike protein that then prompts the immune system to create antibodies that subsequently fight off the modified virus. The person then is expected to be immune to coronavirus, because if the actual coronavirus were to enter this person’s cells, his or her immune system would be triggered to produce the antibodies to eradicate any virus with this spike protein.

With vaccine development now front and center in terms of a solution to the pandemic-induced recession, our hope is that this evaluation of vaccine progress and the mechanics might be useful for clients vis-à-vis portfolio perspectives, expectations, and decisions in the quarters to come.

Print PDF > Coronavirus Vaccines in Progress

¹ For those not familiar with medical treatment clinical trials, the following summarizes each phase’s timeframe and focus:
Phase I typically lasts several months to a year. Its focus is on whether the drug is safe enough to check for efficacy. Serious side effects will be monitored. Because of the small number of human test subjects — usually 20 to 100 volunteers for Phase I — rare side effects may not be uncovered until phases II or III.
Phase II typically lasts two years. Its focus is on whether the drug has any efficacy. Usually 100 to 300 patients are divided into two or three groups for a controlled experiment by testing the new treatment against other treatments.
Phase III typically lasts several years. Its focus is on the degree of the drug’s therapeutic effect. Usually Phase III involves 300 to 3,000 patients in order to achieve rigorous statistical significance in assessing final levels of efficacy and safety.
² On April 27, 2020, Moderna submitted the application for Phase II, which is expected to start this quarter, and they expect Phase III to start in the fall.
³ Recently Gilead’s antiviral remdesivir was hailed by National Institute of Allergy and Infectious Disease Director Dr. Anthony Fauci as a promising drug that can block COVID-19. In the latest trials, remsdesivir helped patients recover in 11 days versus 15 days with a placebo. Only 8% of patients died taking remdesivir versus 11% of patients who took the placebo. Currently there are several trials to test if remdesivir could stop COVID-19 from replicating. Marquette will continue to monitor remdesivir and other antivirals, as well as the antibody and vaccine candidates, in their progress.

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.