It is less than a week until Election Day. But Covid-19 fears are what is dominating the market. Case counts are spiking in Europe with France the current epicenter. Rising case counts are quickly followed by an increase in the number of people hospitalized. In the U.S. case counts are rising as well to the highest overall levels since the pandemic began. Regionally, there are particular hot spots, but so far, few areas are seeing hospitals overly stretched.
With that said, we are all exhausted trying to live life as normally as we can. We have adjusted to eating outdoors, altered vacations to stay off of airplanes, and started to send our kids back to school. But another surge in cases is going to halt or even reverse all that progress. Perhaps the saga of Los Angeles Dodger third baseman, Justin Turner, says it all. In the final game of the World Series, he was yanked in the late innings after it was discovered that he had tested positive in his most recent test. But after the Dodgers won Game 6 and the Series, he was out on the field with teammates, without a mask, joining in the celebration. How many more members of his team, if any, become infected will be determined in the days ahead. What we saw was that the excitement of winning it all simply overwhelmed the obvious cautions we have all been living with for months. Turner is a strong young man as are most of his teammates. But as we learned from the White House Rose Garden ceremony that introduced Amy Coney Barrett as a nominee to the Supreme Court, letting our collective guards down, even for one celebration, can lead to a spike in infections.
Covid-19 is highly infectious. It is deadly. And we all have some fear of its consequences. We have been told for months that fall, cooler weather and a return to indoor activities would lead to a rise in cases. A rise and a spike aren’t the same, however. No one wants to see hospitals overwhelmed again. Unfortunately, in some cases, they will be. In the past, reactions to spikes have been behavior modifications. More masks. More social distancing. Bars shut down. People who thought it was becoming safe to fly, stopped flying.
But even if the fall surge proves to be as great as the initial onslaught in the spring, it won’t impact the stock market the same way. Here’s why.
1. This time we aren’t caught off guard. We have learned how to manage spikes better. The elderly and others at greatest risk get isolated sooner. Testing is much better (although still far from perfect). Hospitals have developed better treatment protocols. We have learned what drug protocols can lessen acute symptoms.
2. We don’t need massive shutdowns. Factories don’t have to be closed. But workers need to be spaced, and PPE equipment must be used appropriately (including masks). Testing can control spikes. Quarantine those testing positive and others in close contact, not everyone.
3. Even if a total quarantine would be the most effective option, the human need for interaction simply won’t allow that again. We will balance better the need to control and trace the disease with the need to keep our economy open.
4. Vaccines are in sight. Remember that stocks look 6-9 months ahead. 6-9 months from now it is expected that at least one or two vaccines will be available for those at greatest risks. While mass inoculation may be further off, the fact that those most concerned will have an option to protect themselves, at least partially, should help the economy to move forward.
5. The market overreacted in the spring. A 35% decline was simply too much. Everyone forgets Newton’s law that every action brings an appropriate reaction. Businesses learned how to cope. Not all, for sure. There wasn’t much a movie theatre or a cruise ship owner could do. But for the rest, quick adjustments put normality back into play.
6. Everyone, by now, should have all the toilet paper they need.
In the short run, markets will react instinctively to the news. Daily 1-3% declines can be expected amid short-term calls for business closings, even if they are targeted. Pictures on the nightly news of overwhelmed emergency rooms will raise fears. On the positive side, heightened fears will bring appropriate reactions which will crush the spikes. That is what happened in April and again in June when the South paid the penalty for being too complacent. The current spike could impact Q4 GDP. The hit, depending on its length and severity, could impact it a lot. But a spike is a 1-3-month event. It will pass. And so will the economic impact.
The next logical question is which sectors of the market will get hit the most. The answer should be that the companies most impacted economically will be the ones that suffer the most. And, indeed, that is what I believe. The recent increase in bond yields will be quickly reversed. That will actually allow P/Es to climb again, if only for a short time. If we revert to eating at home again, staying off the roads, and deferring long distance travel, then the pain will be felt most by the same companies that have been in the crosshairs of this virus since the start. The fact that Congress couldn’t agree on another stimulus package makes the pain for small businesses, theatre owners, and airlines worse. It means more will fail. It will be months before we fully understand the extent and costs that failure might be. But we do know that companies least exposed to empty buildings, loan impairments and idle capacity will do the best.
And, by the way, there is an election coming. Investors seem to have come to a conclusion that either candidate is less threatening at the moment than the virus. A Trump win would mean four more years of the same. That isn’t perfect. Markets don’t like tariffs nor the uncertainty that comes from Trump’s chaotic behavior. But they have adjusted and can deal with four more years of the same. As for Biden, a lot depends on what happens with the Senate. If Republicans hold control, it may not be four years of gridlock, but the changes will be relatively modest. Even if Democrats win the Senate convincingly, the first needs will be economic relief from the pandemic, a better balance between spending and revenues, and some attempt to reverse the corrosive bipartisanship of the last 20 years. The extreme ideas, like Medicare for all, or massive new entitlement programs, are simply notions for the liberal media to debate. Markets appear convinced they won’t happen. I firmly agree.
Here’s what I do know. Come Christmas, now less than two months away, we will know a lot more than we do today. We will know who is President. We will know what his cabinet will look like. We will probably know his initial initiatives. We will also be at or around the peak of the Covid-19 surge. Will school reopen for spring semester? We will likely know. Will anyone be eating indoors in a restaurant? We will know that too. Even if we are in the midst of a debilitating surge, we will see the path out. This surge may not be the last, but it will probably be the worst. Several vaccines will be close to approval.
Thus, if markets fall 5%, 10% or more in the coming weeks, they will reverse themselves. The Fed will keep rates near zero. There will be another stimulus bill in January (or sooner) no matter who is elected. A year from now, this will all seem like a bad dream, one most of us forget when we wake up.
Today, Joaquin Phoenix is 46. Julia Roberts is 53. And remember that super smart teenager who founded Microsoft? Today, Bill Gates gets his Medicare card as he turns 65.
James M. Meyer, CFA 610-260-2220