The year is just about half over, and the full history and effects of Covid-19, will not be written for a long while yet. Most of the prognostications that were made early March; The fall of Xi Jinping in China; the failure of the NHS; the early recourse to a vaccine and ‘life as normal’ have all been proved wrong. ‘Markets will die’, was slightly correct mid-March – but corrected in April/May.
But one thing that is true, is that the American failure to stop the virus is beginning to be felt in real time economic activity, as our mobility in Europe now overtakes that of the USA. So could we see the ‘March’ effect again? Well it is possible, as are all things in Markets, and the US Stock markets have outperformed the European markets for more than a decade.
But to be absolutely clear, we have learned there is absolutely no direct link between the pandemic and the performance of Stock Markets, in either relative or absolute terms. There are too many variables in play in stock markets for one thing to have a direct correlation. Yes! The anxiety about the continuing rise of cases in the American sun belt is putting certain sectors of the market; (Airlines; Hospitality: Leisure) under pressure, but there is an overall reluctance for markets generally to wilt under this anxiety.
As it stands, as of last Friday (26th June 2020), the S+P 500 Index stood almost exactly at a level of 3,000, and just below its 200 day moving average. The last time this index stood at this crossroads, the markets went higher. If this happens again, this will push European indices higher, because Europe has the ability currently to do something that the USA cannot do, control the virus!
For the second half of the year, American politics will come more to the fore, with current polls showing a victory for the Democrat Candidate, Joe Biden. Stocks have historically sold off when the opposition party has won a presidential election; but over the longer term, history again proves that the S+P 500 Index performs better, under a Democratic President.
So political risk seems to be, short term downside. So what can we expect from Covid-19? Well, treatments don’t stop the virus from spreading, but they are vital in helping those affected recover; so expect further scientific development here. Developing a vaccine is needed to fully end the current issues, but if enough of the population becomes immune, then the virus can no longer spread. Herd immunity. This also relies on Antibody testing, so there will be further development here.
Second wave? If there is no vaccine and no herd immunity, a second wave is possible, but this is likely to be more localised – leading to more direct action in those areas. We do not believe a second total lockdown will occur, as it did earlier in the year.
So what have we learned during these torrid times? Markets can disconnect themselves from things such as pandemics, and they pay more attention to the activities of Central Banks than individual Governments. That seems to me to be all the right calls from the playbook on economics, so all we need now is a little more sunshine, and a few cold beers in a socially distanced pub!
Until Next Time.