Stocks staged a tentative rally yesterday that gained a bit of strength toward the end of the session. The Covid-19 winners led the rally, while those most impacted by the disease gave up ground.
Over the past several days, there has been a lot of news that has created heightened investor confusion. The death of Ruth Bader Ginsburg. The rise in Covid-19 infection rates, particularly in Europe. A realization that it is increasingly possible that we might not know the winner of the Presidential election on the morning of November 4. All these news events give rise to wild suggestions of a Hollywood style horror show.
What markets started to say yesterday and overnight in the futures market is “calm down”. The world, at least from an economic perspective, hasn’t changed much. A more conservative Supreme Court might shift the nation’s stance on key social issues, but it would also probably support less regulatory oversight. The one area of legitimate concern relates to Obamacare. The Court will hear arguments on November 10 regarding a lower Court decision that overturns part of the law. The Court could allow that decision to stand, could declare the entire law unconstitutional, or could leave the status quo as it exists today. The outcome, which probably won’t come until next June, will impact how medical services are delivered and would particularly impact health insurers and those who are involved in the delivery of medical services. But with that exception, the changes in the Court are not likely to move the economic needle.
The election itself is creating its own confusion, accelerated by state court decisions that allow the counting of ballots to continue for weeks after November 3. But take a deep breath. Today, we don’t know who the next President will be. On November 4, we may not know either. If the election is very close, it may take weeks to decide. But as long as the voice of the people (i.e. the votes) matter, the election will be resolved and we will move on. In 2000, markets didn’t react wildly as the Bush/Gore mess wound its way through the courts. Markets will react differently depending on the ultimate winner, but will get to the same end point over time. The exception would be if courts overruled the vote or some other Hollywood horror movie ending happens. Those hypotheticals, at the moment, are just that. Markets ignore them, at least for now, and they should.
Finally, let me address the rise in Covid-19 infections. While we all remember February and March, when stocks fell 35% as we were all steamrollered by the sudden appearance of a pandemic, markets barely budged as hospital emergency rooms were overwhelmed in Los Angeles, Miami and Houston over the summer. The difference was that the former shut the economic world down, the latter did not. As fall arrives (as in yesterday) and we move back indoors, case counts are going to rise. We knew that. Now it is happening. In London, they are closing bars earlier. Here bars are largely closed to begin with. As for schools, we are actually seeing efforts to reopen some. Big Ten football is back. I am not an epidemiologist and can’t predict the virus, but I do know that our health system has learned a lot in six months. Deaths are way down. Nursing home infection rates are a fraction of what they were in April and May. We are using ventilators less and therapeutic drugs more. Many of the newly infected are young adults who can tolerate the disease better. Unless there are severe economic consequences to a second wave, the stock market will ignore them.
Finally, there is the question of another fiscal bill to support the economy. Most believe some additional support would be beneficial. Key industries that are on life support now need some help. It is likely that over the next six months more non-chain restaurants will close than will open. The same goes for small retail shops. That’s known and it probably would be the same with or without additional Federal support.
The bottom line is economic recovery continues. The pace will slow because the easy part, mostly associated with reopening, is behind us. From here, two things have to happen. The first is a vaccine. While President Trump will pressure the FDA to approve a vaccine for emergency use in late October before the election, vaccine use for many months will be limited and won’t impact the economy much. It won’t be until widespread use happens that one should expect a rapid rise in airline traffic or indoor restaurant seating. As we have learned from testing, getting widespread distribution and easy access is far from trivial. Then we have to learn how effective the vaccines are. This should all be a 2021 first half event. That doesn’t mean everyone who wants to be vaccinated will get a shot by June 30, but it does mean the roadmap will be clear by then, hopefully.
The second part of the recovery equation will take longer. That is replacing all the businesses that die during the pandemic. Those empty storefronts on Main Street will take years to replace. In some places there are still empty storefronts from the Great Recession.
These businesses employed people. Those put out of work will have to find new jobs. For some, it will mean new careers. That takes time. That is why it will probably be 2022 before some semblance of normal returns. Not only will the storefronts start to fill again, we may actually be making fewer Zoom calls.
The overriding factors that influence stock prices today are the ultra-low interest rate environment that will be with us most likely for at least two more years, and the reality that the pandemic’s negative influence on economic activity will gradually fade. All the news about the Supreme Court, the Presidential election, and a rise in Covid-19 case counts is far less important to financial markets.
Do you remember Y2K, twenty years ago? My guess is that since everyone is worried whether their vote will be counted, our nation will do a better than expected job of counting votes. If the Post Office doesn’t deliver ballots, heads will roll. If your local precinct can’t count votes accurately, someone will be accountable. For sure there will be some glitches, but those are much more likely to be anecdotal than change the results of the election. Don’t let media hysteria distract you from that truth. We are in an economic world that is recovering from a pandemic and will continue to recover. That’s the bottom line and why financial markets are behaving as they are.
Today, Bruce Springsteen is 71. Born in the USA.
James M. Meyer, CFA 610-260-2220