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Stock Market Whipsaws on Vaccine Hype – But Smart Money Isn’t Buying It

Last Updated September 23, 2020 1:57 PM
Joseph Young
Last Updated September 23, 2020 1:57 PM
  • The U.S. stock market is falling in pre-market as a top Chinese vaccine stock falls.
  • Scientists worry that investors are prematurely optimistic about phase one trial results of vaccines.
  • Investors are rushing to trade stocks, as retail continues to fuel the market.

The U.S. stock market has rallied in the past week due to widespread optimism towards phase one trials of coronavirus vaccines. In Asia, investors are seemingly becoming more cautious toward the progress of vaccine development.

Declining sentiment around vaccine-developing pharmaceutical corporations in Asia may move over to the West. The Dow Jones Industrial Average (DJIA) is down nearly 200 points in pre-market.

stock market
The U.S. stock market up 30% since the last week of March | Source: Yahoo Finance 

Smart Money is No Longer Betting on Vaccines

On March 4, Chinese biotech giant CanSino Biologics said it is working with China’s military to produce a coronavirus vaccine.

Its stock surged by almost three-fold  since then and it continuously rallied as other major economies like Germany and the U.S. sped up coronavirus vaccine development.

But, on May 21, the stock price of CanSino Biologics plunged by 23%  in the Hong Kong stock market.

The drop-off of the biotech stock in itself does not provide much insight into the sentiment of the stock market around vaccines. But, it is rather the investors that led the sell-off which makes the trend noteworthy.

According to Bloomberg, traders are pointing at large investors selling their share in CanSino in a short period of time to the primary reason behind its rapid decline.

More than 17 investors sold over 10,000 stocks in a single trading session, triggering a cascade of sell orders.

The cautious stance of large shareholders of the biotech company shows that investors no longer have the same enthusiasm towards a coronavirus vaccine they had two months ago.

coronavirus vaccine
Experts warn coronavirus vaccine development will take time | Source: Adar Poonawalla 

From March to April, companies across Europe, Asia, and other leading economies rushed to create vaccines.

In May, several companies in the U.S. such as Pfizer and Moderna showed solid progress in running clinical tests of coronavirus vaccines.

But, the trend seen in Asia suggests the big investors are starting to lose confidence in the predictions of vaccine distribution  by the end of 2020.

It also suggests traders are starting to take profit from the extensive stock market since late March.

The U.S. stock market increased by 32% since March 23. Yet, apart from optimism surrounding vaccine development and the aggressive fiscal policies from the Federal Reserve, it is difficult to justify the current momentum of the stock market.

stock market
People are rusing to trade in the stock market | Source: Lisa Abramowicz 

What Happens to the U.S. Stock Market if Vaccine Hype Subsides?

One of the key catalysts of the ongoing stock market rally in the U.S. is hope for a vaccine from local pharmaceutical companies. It is partially why retail investors are consistently rushing to trade stocks in the market.

If projections of a coronavirus vaccine by the year’s end start to cool down, there is a strong possibility that U.S. stocks see a similar trend as Hong Kong’s CanSino.

Castor Pang, Core Pacific-Yamaichi International Hong Kong’s head of research, said regarding the Chinese company :

“People are making bets on the success of its vaccine, but the trial is just in stage two and there is possibility for it to fail.”

The same logic can easily be applied on American stocks. The Moderna stock is surging, yet scientists say the phase one trial results do not show sufficient evidence  to describe it as a breakthrough.