New COVID Mutations Could Prompt A Market Pullback


he next 100 days could be critical in the long running fight against COVID-19. We have repeatedly expressed confidence that by the second half of 2021 vaccines will allow a return to some semblance of normal economic activity.

Although we continue to believe that is the most likely outcome, we must acknowledge the risks to our outlook posed by emerging antibody resistant strains of the COVID virus. These virus mutations have not yet been detected in the United States, but are spreading fast in South Africa and Brazil.

President Biden has set a goal of 100 million vaccinations in the first 100 days of his presidency. We believe that the Biden administration can meet that goal and provide an even greater number of vaccinations in the second 100 days. If we are correct, then the US could achieve herd immunity before new strains of the virus can take hold.

However, the initial vaccine rollout has been plagued with distribution and production problems. If these problems persist, antibody resistant COVID mutations could spread to the US. The resulting economic disruption would likely push our anticipated economic recovery out to 2022. Fears of such a delay in the economic recovery could cause a pullback in financial markets over the coming weeks.

Antibody Resistance Means Reduced Vaccine Effectiveness

As with any pathogen, the COVID-19 virus mutates and evolves. Each mutation can change the characteristics of the disease. So far, four mutated variants of the disease have been identified in different parts of the world. The strains that emerged in the United Kingdom and Denmark appear to be far more contagious than the original COVID virus. Preliminary research indicates that these viruses may also be somewhat more deadly.

However, people with a previous COVID infection appear to have antibodies that protect them from the new UK and Denmark variants.

By contrast, the natural antibody defenses acquired from a prior COVID infection do not appear to work very well against the new Brazilian and South African COVID strains. Initial research suggests that these new viruses may be 10 times more effective than the original virus at evading antibody defenses.

Manaus, Brazil, was the epicenter of the original COVID outbreak in the spring of 2020. Doctors felt the city had achieved herd immunity because testing indicated more than 75% of city residents had COVID antibodies. Despite this acquired immunity, Mannaus is enduring a severe outbreak of the new Brazilian COVID mutation. Antibodies acquired during the first outbreak are providing little protection from the mutated virus.

This grim news does not mean that the new viruses will render COVID vaccines ineffective. The mutations may reduce the effectiveness of individual antibodies, but a vaccinated person tends to have far more antibodies fighting the disease. The most likely outcome, according to current reports, is that vaccines will remain effective against the new strains. However, efficacy rates against the new COVID variants could fall significantly from the 95%+ efficacy shown against the original virus.

The Good News: Americans More Serious About Tackling COVID

To prevent the spread of new COVID strains to the US, President Biden reinstated a travel ban from Brazil and Europe on his first day in office. The reinstated travel ban took effect before any visitors arrived from either location. These travel bans have since been expanded and strengthened.

The Biden team is also adding Federal government resources to existing state led vaccination programs. President Biden has established a goal of 100 million vaccinations within his administration’s first 100 days. Assuming that goal is met and that pace is maintained, the US could achieve herd immunity by mid-summer.

Medical experts believe that the key to preventing further dangerous mutations of the virus is to provide herd immunity through mass vaccinations. For example, we do not worry about smallpox mutations because mass vaccinations prevent the virus from spreading. A virus that cannot spread cannot mutate.

These efforts from Washington are reinforced by the American public’s apparent increased willingness to comply with social distancing and other virus countermeasures. The spike in COVID infections that has devastated the US in recent months appears to be peaking. Midwestern states that were at the forefront of the outbreak have seen particularly sharp declines in infection rates, as shown in the chart below.

The sharp decline in COVID cases is testament to effective virus countermeasures adopted by those states, but such measures require widespread compliance from the general population to be effective.

Adherence to anti-virus measures may be increasing in recent months because far more Americans have been directly impacted by COVID-19. The tragic surge in COVID infections has meant that the number of Americans who know someone with COVID has doubled over the past three months, from about 20% to nearly 40% (see chart below). Nearly 1 in 3 Americans know someone who has been hospitalized or died from the disease.

Compliance with mask wearing, social distancing, and other COVID containment measures may increase once people have personally seen the impact of the disease. Such personal experience with COVID should also increase demand for vaccinations and make it easier for the Biden administration to hit their vaccination goals.  

The Risk: Delay Full Economic Recovery until 2022

We believe that positive trends in social distancing adherence, travel bans, and an aggressive vaccination program could prevent a widespread US outbreak of antibody resistant COVID strains. However, the rapid global spread of the UK COVID variant illustrates the risks presented by new strains of the disease. Antibody resistant strains from South Africa and Brazil heighten the potential consequences of an outbreak of mutated COVID strains.

Although aggressive vaccinations will provide some protection from new viruses, protection against some new mutations is likely to fall short of the efficacy seen against the original COVID virus.

If an outbreak of antibody resistant COVID occurs, medical researchers will undoubtedly devise new vaccines that are as effective as current vaccines. However, designing and manufacturing new vaccines will likely take many months. We must acknowledge the risk that an outbreak of a COVID variant with more resistance to current vaccines could delay full economic recovery until new vaccines are deployed.


Researchers continue to believe that vaccine resistance will not be an insurmountable problem in the fight against COVID. Although existing vaccines may prove less effective against the new South African and Brazilian strains, researchers appear confident that vaccinated people are less likely to contract the new viruses.

If new COVID variants take hold across the world, then people may need annual updates to their COVID vaccinations like their current flu vaccinations. Economic recovery would merely be delayed until these updated vaccines are deployed. Any such delay in a full US economic recovery would likely prompt more fiscal stimulus funded by more printed money. As we saw in 2020, markets can be driven higher by printed money even in the face of a severe economic recession.

The primary market risk we see arising from another potential COVID scare is the risk of a long overdue market correction. Equity markets have been soaring upward without interruption since October. Most measures of market sentiment are extremely overbought, which has often signaled a market pullback. Continued scary headlines about new COVID variants could provide the catalyst for such a pullback, especially if those headlines coincide with political wrangling over the proposed Biden stimulus plan.

We have been consistently calling for a bubble in US equity markets since the market declines of last March. We believe in the bullish case for US equities so long as the Fed and the Treasury are firmly advocating more stimulus. In recent months, our bullish call has become the consensus as more and more market analysts pile on the equity market bandwagon. Being bullish has been easy since October as financial market have gone straight up without a pause. Those bullish sentiments may be tested in the coming weeks.


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