Stocks fell again on Friday marking the end to the third weekly decline after two very strong months in July and August. Tech leadership names continued to go down. However, the rally in stocks of companies most hurt by the pandemic could not sustain recent strength. Over the weekend, Covid-19 case levels rose at an accelerated pace in Europe and in the UK in particular. This elevated fears and have futures trading lower this morning. Financials, energy, airlines and cruise ships are leading the decline. If you look back to June, stocks of these groups had a short-lived spike upwards as most states reopened after the spring quarantine period. That recovery didn’t last long, however, as the pace of recovery was uneven. Even allowed, many Americans didn’t want to eat indoors or fly on a plane.
This brings us to this morning. During July and August, as the impact of the virus seemed to fade a bit, with only a few brief spikes in some Sunbelt states, American confidence to lead fairly normal lives increased. They still didn’t want to eat indoors a whole lot, nor did they get on planes, but they took vacations, enjoyed outdoor life, and spent freely. The pace of recovery was fairly sharp. It was buoyed by three fiscal stimulus bills passed by Congress that put money into the hands of those without jobs, provided loans to small businesses to stay alive, if only temporarily, and helped to increase confidence.
But now, we enter the fall. Cooler weather has arrived. While most continue to tolerate the cooler weather and continue to eat outdoors, much of the spring and summer stimulus funding has run out. Even with unemployment back under 9%, there is still significant slack. Offices are well under 50% full. Many schools are virtual. That not only impacts education quality, it also impacts clothing and restaurant sales. The spike in Covid-19 cases is concerning. Even though most flights between Europe and the U.S. are curtailed, the two worlds are not completely isolated. We would be foolish to think that what is happening there won’t happen here. Indeed, if you look back to the spring, Europe was forced to shut down about a month before the U.S. If what is happening in Europe is a forerunner to what we might expect soon (note I said “if”), then a relapse in the stock market would be appropriate.
With that said, an uptick isn’t a spike forcing closures on the same level as last spring. We have better (but still inadequate) testing and tracing today. Health professionals have more knowledge and better experience to fight any outbreaks. While Covid-19 is still a disease to be reckoned with, the threat is less when you know your enemy than when you don’t. Thus, a pullback in the market and in the pace of economic recovery is real. But a sharp 35% retracement, as we saw in the spring, appears highly unlikely. What is likely, however, is that the Covid-19 “winners” should regain market leadership while the losers will now require more time to recover. Their stocks will likely give up recent gains.
There is a lot more news for markets to deal with. Late last week, the Pennsylvania Supreme Court ruled that ballots that are postmarked by November 3 and received by November 6 can be counted. Mail-in votes cannot be counted until Election Day. As a result, the Pennsylvania results, and those states with similar rules, are not likely to be counted and certified for at least a week after the election and perhaps for quite a bit longer. Over half of Pennsylvania voting precincts had not finished their primary totals 7 days after the election despite a very small turnout. Note also that the totals reported on Election Night, almost all from voting machines, are likely to offer results very different from final totals, as a much higher percentage of registered Democrats are choosing to vote by mail than Republicans. In other words, the election now is almost certain to be a mess, to be challenged in Court, and ultimately decided by the Supreme Court.
Which, of course, takes us to the passing of Justice Ruth Bader Ginsburg. President Trump will nominate a replacement this week. He has already said it will be a female. Speaker McConnell has said he will take up the nomination quickly. If the Republicans can hold their majority together, losing only 3 votes or less, she will be approved. It is unclear at this early date whether any approval will happen before Election Day or not. It is also unclear, since we haven’t even seen the name of the nominee and no hearings have been held, whether the new Justice will hear any case involving the election. But even if she doesn’t, the Court will still decide a contested election. A 4-4 vote would allow a lower court ruling to stand. I doubt the Supreme Court will allow that to happen. We don’t even know at this time the conditions for appeal. All we know, after last week’s Pennsylvania ruling, is that the odds the Court will become involved increase greatly, and that the death of Justice Ginsburg can only complicate matters.
The death of Justice Ginsburg also lowers the odds that a fourth stimulus bill will pass Congress this session. It doesn’t eliminate the possibility. Should the economy or stock market decline materially, or Covid-19 cases spike again, Congress will act. It almost always takes a good crisis for Congress to act. But barring a severe external shock, the heightened acrimony (if that is even possible) probably ensures no relief bill without a crisis. That could be an added factor in the sharp drop in futures pre-market.
Thus, the death of Justice Ginsburg, the rise in Covid-19 cases, and the momentum from three weeks of decline, all serve to set the market up this week for more weakness. But the economy is still moving forward, more businesses are reopening, housing is very strong, and inflation remains non-existent. All these factors say any decline could be contained. As for the election itself, most Americans have their minds made up already. The death of Justice Ginsburg is unlikely to sway many voters. If there is a remaining obvious factor that might change voters’ minds, it would be the pending debates. Investors need to be vigilant about the current rise in virus cases and how that might affect the rate of economic recovery. But history suggests any relapse will be limited to a few months and should not have severe long-term impact. Bull markets are always two steps forward, one step back. Let the one step back run its course, but have your buy list ready.
Today, Faith Hill is 53. Bill Murray is 70. Stephen King turns 73.
James M. Meyer, CFA 610-260-2220