Why virus stocks are driving market volatility


The market’s erratic response to lukewarm medical research for COVID-19 treatment and vaccine candidates isn’t expected to slow down as investors pin their hopes for a recovery on the high-risk biotechnology sector.

“In the coming few months, the stock market, especially related to COVID-19, will continue to be volatile,” said Difei Yang, a biotech analyst at Mizuho Securities. “It’s driven by retail investors, rather than institutional investors…they react to headline news, and the market reacts.”

Case in point: on May 18, Moderna Inc.
MRNA,
+4.42%

became the first company to disclose data from a clinical trial testing a COVID-19 vaccine in humans. The preliminary data implied efficacy; however, the biotechnology company only shared data from eight out of 45 participants in the Phase 1 clinical trial. The stock jumped 20%, closing at a record high of $80.00, and the Dow Jones Industrial Average soared 3.9%, to finish at 24,597.37, erasing much of the month’s losses.

The next day Moderna’s stock took a dive, closing at $71.67, with analysts attributing the drop to a Stat News story outlining skepticism among vaccine experts. The Dow tumbled 1.6%, to end at 24,206.86, near a session low.

See also:Moderna’s stock soars, then dips, after questions arise around the limited data shared about its COVID-19 vaccine

The thing is, the story wasn’t particularly damning. It did raise important questions, including why the data was released for a percentage of the trial’s participants and why the National Institute of Allergy and Infectious Diseases hadn’t put out a news release or comments from NIAID director Dr. Anthony Fauci, as the federal agency had done with clinical-trial data for Gilead Sciences Inc.’s
GILD,
+0.24%

remdesivir. (Fauci later told NPR that the Moderna vaccine data “is really quite promising.”)

“Out of realm of its expertise, [the market’s] got a bias upward,” said Kristina Hooper, chief global market strategist at Invesco. “That creates an environment where you tend to see a very positive reaction by stocks to a development that might seem minor to health experts.”

There are two reasons behind the volatility: individual investors who don’t understand how drug development works may be simply reading a headline before investing in virus stocks. At the same time, there has been a shift in how medical research is disseminated as sites are now publishing COVID-19 studies before they have been vetted by other clinical experts.


“It’s a big pocket of froth. ”


— Brad Loncar, CEO, Loncar Investments

Much of the scientific and clinical research that has been published since January about the coronavirus has been in the form of a preprint, a type of preliminary study that hasn’t been peer-reviewed. While preprint-style research has been around for decades, notably in physics, math, and economics, a pair of commonly cited preprint websites, BioRxiv and MedRxiv, for coronavirus studies were launched a year ago by Cold Spring Harbor Laboratory in partnership with The BMJ medical journal.

The publication of preprints has likely been a contributor to some of the market volatility, Mellon analyst Amanda Birdsey-Benson said. “They are giving a lot of false hope and a lot of disappointment.”

Separately, some top-tier medical journals have taken to publishing coronavirus research that has not been peer reviewed or is now going through a much speedier review process, perhaps due to pressure from the preprint sites, according to Ivan Oransky, a cofounder of Retraction Watch, a site that tracks retractions in scientific research, and VP of editorial at Medscape. For example, a study of eight people conducted over a few months is contextually “meaningless,” as is a single-arm study with 61 patients, he said.

“The preliminary nature of what I’ve seen published in top journals is eye-opening,” Oransky said. “It forces us to rethink what peer review means, what rigor means, and what prestige means.”

In recent months, the market has risen and fallen on preprint research, and virus stocks have soared and tumbled on limited data disclosures from clinical trials, in-vitro studies of experimental products that haven’t been tested in humans, or even the news that companies are simply planning to join the race. “It’s a big pocket of froth,” said Brad Loncar, a longtime biotech investor and CEO of Loncar Investments.

Since the start of the year, the SPDR S&P Biotech Exchange-Traded Fund
XBI,
-0.90%

has gained 7.8%, making the biotech sector a top three performer among S&P ETFs during a year in which the coronavirus pandemic has hurt markets and decimated jobs. Several virus stocks began rallying by Jan. 23. In comparison, the S&P Low Volatility Index is down 14.9% for the year, while the S&P 500
SPX,
-0.18%

has declined 6.2%.

“The investor reaction is not entirely surprising,” said Randy Frederick, VP of trading and derivatives for the Schwab Center for Financial Research. “We’ve never dealt with anything of this magnitude.”

In the case of Gilead, the company has added about $12 billion in market capitalization since Dec. 31, as investors put their hopes on remdesivir, an experimental drug that first entered development in 2009, failed as an Ebola disease treatment, and was repositioned as a possible treatment for COVID-19 patients in China in January.

On April 30, when the NIAID said a Phase 3 trial found the drug helped get some severely ill COVID-19 patients out of the hospital four days sooner than those not taking the drug, the stock closed at $84.00. Since then remdesivir received an emergency use authorization from the Food and Drug Administration, and shares of Gilead have dropped to $75.09.

“With shares now down [about] 14% from last month’s highs — that we believe were fueled by constant remdesivir newsflow and overly optimistic expectations for significant NT remdesivir revenues — we now see a greater valuation disconnect and even more attractive buying opportunity,” RBC Capital Markets’ Brian Abrahams wrote in a May 27 note to investors.

See also:Gilead reports early positive data in remdesivir studies as COVID-19 drug, though Chinese trial sees no benefit

For investors without biotech expertise, a bet on a virus stock that could yield an emergency use authorization for a treatment or vaccine used by potentially millions of people seems rational. However, vaccines have never been big moneymakers for pharmaceutical companies, and the ones that do make it to the market have historically taken between five to seven years to develop.

In the current circumstances, the legacy pharmaceutical players have been very clear that they don’t expect their COVID-19 products to boost their bottom lines. Johnson & Johnson
JNJ,
-0.00%

plans to offer its vaccine, if it works, on a not-for-profit basis. Gilead so far has made remdesivir available through donation, with the CEO telling investors it was the “right thing to do.”

“Even the companies that do ultimately come up with useful therapies and vaccines are unlikely to make money,” Schwab’s Frederick said. “How much income are those companies going to make? Is there a net return? It’s something I wouldn’t be too excited about.”

That said, biotech experts said the broad support for the sector may hint at growing respect for what these companies can do, given how quickly many of them have ushered experimental therapies and vaccines into clinical trials to treat a disease that no one had heard of six months ago.

“Biology is where the action is going to be for years,” Loncar said. “People have gotten the message how integral this is to society.”



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Chase Sapphire reward points can now be redeemed for groceries and takeout. ‘These are strange, strange times’


Chase Sapphire cardholders
JPM,
-1.58%

will be able to use their rewards points to cover purchases like groceries and takeout food thanks to a temporary new feature.

Called “Pay Yourself Back” the new system will allow cardholders to use their rewards points to cover a portion or all of existing purchases at grocery stores, home improvement stores and dining, including restaurants, takeout and eligible delivery services.

The new points program will go into effect May 31 for the Chase Sapphire Preferred and Reserve cards, and the bank plans to extend the feature to other cards in the future. The new system is currently set be available through September 30. “We will be looking to evolve to keep the categories fresh and over time introduce other eligible Chase cards to the feature,” a spokeswoman for Chase told MarketWatch.

Also see:Walt Disney World proposes July 11 for phased reopening, later than other Florida theme parks

To redeem points through this service, Chase cardholders will log into their rewards account and select from eligible transactions within the last 90 days.


‘All of these changes indicate that card issuers don’t expect things to get better very soon.’


— Matt Schulz, chief credit analyst at LendingTree

Cardholders will get more value when they redeem points this way versus getting cash back. When converting points to cash back, one point is worth 1 cent. Through Pay Yourself Back, points will be worth 25% more for Sapphire Preferred card holders and 50% more for Sapphire Reserve card holders, Chase said.

Historically, Chase has focused its Sapphire rewards on travel purchases, but like other card issuers, the company has had to shift gears because of the coronavirus pandemic.

“No one signs up for a high-end travel credit card wanting to use those points for groceries, but these are strange, strange times, so a lot of the old conventional wisdom doesn’t apply right now,” said Matt Schulz, chief credit analyst at LendingTree
TREE,
-0.63%
.

But consumers who hold multiple rewards-earning credit cards might see the value of those cards decrease, because many other companies have shifted toward purchases at grocery and home improvement stores.

“There’s a lot of overlap,” said Ted Rossman, industry analyst at CreditCards.com. “If you used to have three different travel cards — maybe a transferable points card like the Sapphire Reserve or Sapphire Preferred, plus an airline card and a hotel card — now you essentially have three grocery cards.”

Don’t miss: Half of all Americans are canceling their summer vacations — what to expect in refunds from cruise lines, hotels and airlines

Many credit card companies have extended the time to earn sign-up bonuses. Other credit cards have also adjusted their perks to better suit what consumers are spending money on during the coronavirus outbreak.


‘If you used to have three different travel cards — maybe a transferable points card like the Sapphire Reserve or Sapphire Preferred, plus an airline card and a hotel card — now you essentially have three grocery cards.’


— Ted Rossman, industry analyst at CreditCards.com

Citi Prestige card holders
CITI,
-1.45%

, for instance, can use the card’s annual $250 travel credit on purchases at supermarkets and restaurants. Capital One
COF,
-1.98%

is now allowing card holders to redeem airline miles for food delivery, takeout, streaming and other services. American Express
AXP,
-2.38%
,
meanwhile, has begun offering credits for streaming and wireless services.

“All of these changes indicate that card issuers don’t expect things to get better very soon,“ Schulz said. “Most of these changes probably aren’t permanent, especially the ones made to high-end travel cards, but they’re significant enough that they’re not going to be gone in a month either.”

Consumers in this position may want to re-evaulate which cards they have in their wallets, especially if they have multiple cards that charge annual fees.



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U.K. launches test-and-trace system — even those with no COVID-19 symptoms could be forced to self-isolate


A test-and-trace system to find and isolate people who come into contact with coronavirus will be launched in the U.K. on Thursday.

People with no symptoms will be told to self-isolate for 14 days if they have been in close contact with someone with the coronavirus, as part of the scheme. The program is voluntary, but Prime Minister Boris Johnson said sanctions could be brought in if people did not comply.

Health secretary Matt Hancock unveiled the program and said it would need to become a “new way of life,” adding that it would allow the country to replace the national lockdown with “individual isolation.” A number of U.S. states have also been scrambling to set up contact tracing teams as many begin to emerge from lockdown.

However, the U.K.’s much-anticipated contract tracing app being tested on the Isle of Wight will not be launched on Thursday.

South Korea, which confirmed its first case of COVID-19 a day before the U.S.’s first case, has used a similar system since February. South Korea has reported 269 coronavirus deaths as of May 27 compared with 101,000 in the U.S. and 37,000 in the U.K.

The U.K. abandoned its initial testing-and-tracing strategy in March as the outbreak spread rapidly, Public Health England officials told MPs last week. It has since evolved, leading up to the Thursday test-and-trace launch.

Read:This contact tracing app could become the role model to save the world from coronavirus

Under the new system being launched Thursday, the U.K. government has asked those with COVID-19 symptoms to immediately seek a virus test beginning Friday, those who test positive will then be told to self-isolate for two weeks by one of 25,000 NHS contact tracers.

Hancock said those testing positive will then have to work “like detectives” to identify people they have been in close contact with — within 2 meters for more than 15 minutes in the previous two days. Those people will then also be asked to self-isolate for 14 days.

The system will be voluntary at first because the government said it trusted people to “do the right thing,” in Hancock’s words, adding that it could be made mandatory if necessary.

Johnson said that asking people who are asymptomatic to self-isolate would be a “huge imposition” but would only apply to a small minority of the population. He was addressing a committee of MPs in a separate meeting on Wednesday.

He added that sanctions may be considered for those who don’t follow the instructions. Johnson, who has faced public anger over the actions of senior political adviser Dominic Cummings in recent days, which some claim has undermined government messaging, said he was relying on “people’s public-spiritedness” and their willingness to cooperate and defeat the virus.

Don’t miss:Green light for garden parties, but careful using the bathroom: England releases new guidelines for social gatherings amid lockdown

He also said the government did not have the capacity to start testing earlier.

“To be absolutely blunt, we didn’t have the enzymes, we didn’t have the test kits, we just didn’t have the volume, nor did we have enough experienced trackers ready to mount the kind of operation they did in some other East Asian countries, for instance,” he said.

“And I think the brutal reality is this country didn’t learn the lessons of SARS or MERS, and we didn’t have a test operation ready to go on the scale that we needed.”

Dido Harding, a baroness and the former CEO of TalkTalk who is running the test-and-trace scheme, said it “requires all of us to do our civic duty.”



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Why one stock-market bull, who called the bounce off March lows, now sees the S&P 500 hitting 3,250 by August


The worst is past when it comes to the economic hit caused by the COVID-19 pandemic, clearing the way for the S&P 500 to continue its climb back toward its all-time high through the end of August, according to a Wall Street analyst who called for stocks to bounce back aggressively just ahead of the market’s March 23 lows.

“We now raise our S&P 500 price target to 3,250 by Aug. 30, 2020 (in 3 months), supported by economic survey data improving/bottoming (consumer, services, industrial) and our expectation that the S&P 500 [price/earnings ratio] expands (at prevailing low real bond yields) to offset weak [earnings per share] typical of late-stage recession periods,” wrote Barry Bannister, chief institutional equity strategist at Stifel, in a Wednesday note.

That would mark a 7% rise from the S&P 500’s close at 3,036.13 on Wednesday. Stocks jumped, with the large-cap benchmark advancing 44.36 points, or 1.5%. The Dow
DJIA,
+2.21%

ended Wednesday with a gain of 553.16 points, or 2.2%, at 25,548.27, while the Nasdaq Composite Index
COMP,
+0.77%

advanced 72.14 points, or 0.8%, finishing at 9,412.36.

The gains saw the S&P 500, which fell 34% from its all-time closing high on Feb. 19 to its March 23 low, finish just 10.3% away from its all-time high. The S&P 500 and Dow closed at their highest levels since early March, while the Nasdaq saw its highest close since Feb. 20.

Read:The Dow is on the verge of crossing an important line in the sand that may signal that a record high is next

Stocks traded at record highs in February, then tumbled into a bear market at breakneck speed as the COVID-19 pandemic resulted in the lockdown of the U.S. and economies around the world. Stocks set at least a near-term bottom on March 23, with the S&P 500 closing 33.9% below its Feb. 19 record high at 3,386.15.

Bannister previously acknowledged being initially “blindsided” by the pandemic but called on March 19 for a stock-market rebound that would see the S&P 500
SPX,
+1.48%

rally back to 2,750 by April 30. On April 18, as the index hit his mark, he raised that target to 2,950, but warned that gains beyond that level could be difficult to come by. On April 30 he left his target unchanged, arguing it would likely take another shock, inducing the Federal Reserve to step in with additional stimulus, to fuel another leg higher.

In his Wednesday note, Bannister said that after a month of roughly sideways action, the degree of monetary stimulus by the Federal Reserve and fiscal measures by the government have proven crucial to keeping the market supported, while the recent surge for stocks may signal a positive inflection for gross domestic product in the third quarter, which could boost earnings per share, or EPS, in 2021.

But the 3,250 target also reflects an expectation of a “normal” expansion of the P/E ratio that would offset the fall in EPS.

Although EPS typically declines for about 18 months around recessions, the price of the S&P 500 from the month that EPS peaks to the month that EPS bottoms is usually flat, he wrote, despite earnings falling an average 21%. “This occurs because the P/E ratio of the S&P 500 expands to offset weak EPS,” Bannister said.

And while Wall Street earnings estimates for the S&P 500 have fallen sharply, a fall in the real, or inflation-adjusted, 10-year Treasury yield since June of last year has supported the P/E ratio, he said.


Stifel

Bannister noted that, measured from the March 23 low, cyclical sectors are the top performers. But measured from the Feb. 19 high, cyclicals are the weakest (see chart above). “With room to run, our GDP optimism favors cyclicals, particularly a turn in reflation (weaker dollar, steeper curve): financials, energy, materials and industrials,” he said.



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The Dow is on the verge of crossing an important line in the sand that may signal that a record high is next


The Dow is flirting with a key technical level that is viewed by market technicians as signal that a new bullish trend may be at hand.

The Dow Jones Industrial Average
DJIA,
+1.47%

was up more than 1.3% at 25,324 on Wednesday afternoon, with the market buoyed by optimism around business reopenings after being locked down for the past several weeks due to efforts to curb the spread of the COVID-19 pandemic.

The Dow’s rally on Wednesday afternoon represents a steady move toward retracing 61.8% of the 124-year old benchmark’s coronavirus selloff from its record high in February to a low late March.

If the blue-chip benchmark can finish the session at 25,364.89 or above over the next few sessions, market technicians say that the new trend has been established and that the next move for the Dow may be eclipsing its record high put in on Feb. 12 at 29,551.42 (see attached chart).


Source: MarketWatch and FactSet

“The breakout supports a full 100% retracement of the downdraft, so targets February’s high, and the same will apply for the [Dow industrials],” Katie Stockton, market technician and founder of Fairlead Strategies, told MarketWatch of the Dow’s retracement, while also referencing the S&P 500’s retracement, which was decisively cleared last week.

Indeed, the S&P 500
SPX,
+0.91%

and the Nasdaq Composite
COMP,
+0.29%

indexes have both retraced at least 61.8% of their declines between Febuary and March due to the economic impact of the coronavirus pandemic. The S&P 500’s 61.8% retracement was at 2,947.33 and it is now headed for its first close above its 200-day moving average above 3,000, also viewed by technical analysts as a bullish sign of momentum in an asset.

Many Wall Street chart watchers who follow the Fibonacci ratio, or golden ratio, of 0.618, believe key retracement targets for a rally from a significant low to a significant peak are 38.2%, 50% and 61.8%. Retracements of 23.6% and 76.4% are also seen as secondary targets.

The Fibonacci ratio was made famous by a 13th century Italian mathematician known as Leonardo Fibonacci of Pisa. It is based on a sequence of whole numbers in which the sum of two adjacent numbers is equal to the next highest number (0, 1, 1, 2, 3, 5, 8, 13…).

The ratio is also referred to as the golden ratio, or the divine ratio, because it has been found throughout nature, including the DNA double helix and proportions of the human body. Technical analysts have adopted the ratio to help map the ebb and flow of financial markets.

The Nasdaq Composite’s 61.8% Fibonacci retracement was met at 8,687.79 and its 76.4% retracement is at 9,119.44, according to FactSet data.



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