Stocks fell sharply on Friday as Covid-19 fears rose along with a spike in new cases in some of the country’s most populous states.
As always, there appears to be two sides to almost all stories. The good news is that the rise in cases is much sharper than the rise in hospitalizations while the number of deaths from Covid-19 continues to decline. That is partly due to demographics (new cases skewed toward younger Americans), and partly due to improved care based on experience. The bad news is that the absolute number of cases, hospitalizations and deaths in the U.S. per capita is just about the highest in the developed world. This must be attributed to the likelihood that our county has taken the virus and preventative public health steps less seriously than in other nations. Actually, those most vulnerable, the aged and those with complicating conditions, seem to be taking better care of themselves. Nursing homes, the source of so many deaths thus far, are testing more and isolating those infected at an earlier stage. But as we see every night on the news, younger folks are too often simply ignoring the risks, and therefore are getting infected at a greater rate. If there is to be a second wave of the virus, it would be nice I suppose if the first wave would wane before the second wave starts. Markets on Friday seemed to share that concern.
As noted previously, actions bring reactions. Governors in several affected states are now slowing reopening and/or requiring masks in public places. Others can judge over time whether these steps are adequate but clearly such steps will slow the pace of economic recovery. Stock markets will surely react to that, as they did on Friday.
The difference between the U.S. and the rest of the world is that here public health decisions are generally left to the state and local communities. The Federal government could play a more active role if it chose, but so far it has chosen a laissez-faire approach. There are few signs that will change. In fact, when leadership speaks it downplays the recent increases in infection rates suggesting it is a normal side effect of the reopening process, so important to restarting the economy.
It is almost the end of June. In just about a month, expanded unemployment benefits and other Federal payment programs designed to offset the economic damage of quarantining months ago will expire unless extended. Congress is debating another relief bill. Conservatives want to wait as long as possible to better judge the need for further economic relief. Democratic leadership wants to expand government subsidies beyond unemployment benefits to infrastructure spending and a whole host of liberal agenda items not included in previous legislation. It’s an election year, so expect something to pass. The shape of any pending bill is still up in the air, but the odds favor a fourth economic support package before the end of July.
While Covid-19 will not leave the front page for a while, several other factors will impact markets. Quarter-end window dressing and portfolio rebalancing may create some volatility today and tomorrow. Quarterly earnings season begins in a few weeks. The numbers will be bad, and the trend intra-quarter will show improvement. But the outlook remains murky and most companies affected at all by the virus will remain hesitant to make forward looking predictions.
Finally, as the Presidential conventions approach, there could be increased focus on the election. At the moment, polls suggest Joe Biden is leading, but as we saw in 2016, polls are not all that reliable. With that said, weakness in the defense stocks could be a canary in the coal mine suggesting the stock market is increasingly concerned about the prospect of a Biden win. Conventional wisdom suggests his agenda of more taxes, probably more regulation, and higher spending will be worse for the economy than four more years of Trump economics. But, as I have pointed out before, economic growth numbers during the Trump and Obama years were remarkably the same. That suggests to me that monetary policy and demographics have more influence on GDP growth than the President does. Granted, President Trump’s corporate tax cut was a one-time help that could be partially reversed. But with that aside, whoever is elected will be saddled with bloated debt, too much government spending, and a parcel of state and local governments that will desperately need Federal support. Should Trump get reelected, I think he would have a very hard time moving any substantive new economic initiatives forward. Mr. Biden might introduce programs that would change direction, but passage of many bills with major economic impact would require 60 Senate votes. That won’t be easy even if he were to win in a landslide.
Despite my characterization suggesting that whoever is elected President matters less than one might think, expect markets to remain volatile through the fall as Presidential politics become more important and as normal viral seasons, including colds and the flu, get going when summer morphs into fall and winter. As I have noted before, I think the stock market has entered a phase of very choppy behavior that will ebb and flow with the news headlines. Right now, rising infection rates and the rise of Biden in the polls are headwinds. But the news is not likely to remain consistently good or bad over the coming months. With that said, I have no reason to expect a big spike up or down. For that to happen, reality will have to deviate substantially from consensus expectations. That would mean a sudden and major change in interest rates and inflation expectations (unlikely), a surge or collapse in corporate earnings (also unlikely), a big therapeutic breakthrough relative to Covid-19 beyond anyone’s current expectations, or a major second wave of the disease so severe that it causes a massive slowdown in the pace of any economic recovery. All are possible. None are likely. Therefore, more of the same can be expected, i.e. high volatility will little forward progress.
What I do expect, however, underneath the headlines, is an even clearer differentiation between winners and losers. If there is a resurgence of the disease, fewer people will fly, go to malls, or eat in restaurants. The number of Americans who will constrain their behavior will relate directly to the future severity of the disease. Thus, a resurgence will continue to accelerate trends in place like more online shopping, home delivery, and streaming. Companies slow to adapt will die. When second quarter earnings season arrives, it will attach an exclamation point to the winners and losers. Don’t expect companies that have been lagging behind this long to suddenly discover their mojo. Look at every stock you own. If the company in question hasn’t meaningfully adopted to the changing world today, it’s time to move on.
Actor Gary Busey turns 76 today.
James M. Meyer, CFA 610-260-2220