Amid all the clamor about valuations, Reddit and GameStop, inflation risk, and stimulus it may be worthwhile for investors to remind themselves: It’s all about risk appetite. Put another way, risk appetite drives everything – and yes, it can push asset valuations and prices well past what you might deem reasonable. However, what you deem reasonable and what I deem reasonable are two different things. Any attempt to handicap another investor’s definition of reasonable is at best a challenging endeavor, at worst a fool’s errand. What drives risk appetite? First, you know that you are secure in your prospects enough to take on some additional risk. Secondly, you see other people making money while you aren’t (GameStop, anyone?).

An Improving Covid-19 Outlook
Investors who are contemplating bailing on this market because it seems frothy or exuberant may want to consider the following. Daily Covid-19 case counts are rolling over – and rolling over pretty hard.

US Tests vs Confirmed Cases
Covid 19 US Tests Vs Confirmed Cases
Source: CDC; Natixis PRCG Covid Tracking Project.

Hospitalizations are rolling over.

Current US Hospitalizations
Current US Hospitalizations
Source: CDC; Natixis PRCG Covid Tracking Project. Note not all states report current hospitalizations. Data may include lag in reporting.

Fatality rates appear to be topping out.

US Confirmed Cases & Deaths
US Confirmed Cases and Deaths
Source: CDC; Natixis PRCG Covid Tracking Project.

Of note here is that Covid-19 case counts and fatalities are declining – and only 2.6% of the US has received two doses of the vaccine. This suggests that it is prevention awareness (masks and handwashing) and lifestyle changes (staying home) – not vaccines – that are having an effect. Let’s next assume that vaccination distribution starts to pick up and accelerate.

US Vaccination Progress
US Vaccination Progress
Source: CDC; Natixis PRCG Covid Tracking Project.

Already, the ratio of vaccinations to daily confirmed cases is trending higher – a very good sign. Data also suggests that vaccinations are outpacing new cases.

Daily Vaccinations to Daily Cases
Daily Vaccination To Daily Cases
Source: CDC; Natixis PRCG Covid Tracking Project.

31 million Americans have received at least 1 dose of a vaccine. At this pace, 30% of the population could be vaccinated by April.

Vaccines administered as a % of vaccines distributed is pushing higher. It’s up to 70% now.

States are getting better at distribution. In other words: Given time to work, they’re figuring it out.

Vaccine Administration vs. Distribution
Vaccine Administration Vs Distribution
Source: CDC; Natixis PRCG Covid Tracking Project.

Recent comments from some of the large pharmacies that have partnered with the US government to assist with the distribution effort of vaccines should add to the sense of optimism. CVS has projected that their distribution capacity will be roughly 25–30 million per month. Walgreens is projecting 25 million per month and Walmart is projecting up to 13 million monthly vaccinations. Put together, these three pharmacies alone could handle as much as 50% of US vaccinations.

Between Pfizer and Moderna, the US government has now purchased 600 million vaccine doses, up 200 million from the end of January. Additional supplies from Johnson & Johnson and AstraZeneca/Oxford will be hitting the markets soon as well.

Vaccine Math
The vaccine suppliers have targeted production of 200 million doses of the vaccine by end of 1Q21. So far, they have delivered 60 million doses – so largely on track. They expect some 600 million doses by end of July. This is not that much of a stretch given current run rates. The US government is targeting 40 million vaccinations each month. If we include CVS, Walgreens, and Walmart as part of the distribution effort, that number should get up to 100 million per month. This scenario puts the US on pace to hit 600 million vaccines distributed by end of July – right on schedule.

If we assume that 70% of distributed vaccines are administered (the current rate today) and apply that to the 600 million doses targeted to be produced by end of July, that gets us to 420 million vaccines by end of July.

Assuming a one-month window in between each dose, that would get us to 180 million people fully vaccinated (2 doses) and 30 million partially vaccinated (1 dose) by end of July. Recent surveys show that some 70% of American adults are willing to be vaccinated. If there are 255 million adult Americans, this means 180 million of them are willing to be vaccinated. At the current rates outlined above, that’s the same number of fully vaccinated people that the data is projecting.

The bottom line? If all goes to plan, 70% of the US adult population could be fully vaccinated by mid-summer. The takeaway? Things are getting better.

Putting Vaccinations into a Market Context

Since the initial Pfizer vaccination news, a lot of money has come pouring back into equities.

Weekly ETF and Long-Only Flows: All Equities
Weekly ETF And Long Only Flows All Equities
Source: FactSet, EPFR

But if you look over a longer portion of time, equities are in net outflows since 2015.

International has been the only net beneficiary from retail. Japan too.

Regional Equity Exposure: Cumulative Flows
Regional Equity Exposure Cumulative Flows
Source: FactSet, EPFR

But when we strip out the Bank of Japan purchases, it tells the same story: net selling of Japanese equities.

Cumulative Japanese Equity Fund Flows
Cumulative Japanese Equity Fund Flows
Source: FactSet, EPFR, Bank of Japan.

Is the current market frothy? Is it exuberant? Or are we seeing an increase in risk appetite? We don’t know – if you want to call a market top based on valuations, be our guest. What we don’t see right now is any longer-term deterioration in fundamentals. For now, we’re sticking with an improving outlook.

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