Fear of a second wave is getting a hold on the market
Stockmarkets wobbled after Covid-19 began to make a comeback in many US states. John Stepek looks at what it means for you as an investor.
Good morning. I hope you had a lovely weekend, and took some time out to cavort in your local swamp. Seriously, that’s how The New York Times reported on Britain’s post-lockdown antics this weekend.
Apparently, the British "descended by the tens of thousands on Britain’s southern beaches and jammed into city parks. They cavorted by the hundreds in swamps and streams."
Just goes to prove my regularly reiterated point about how you have to take international reports on domestic events with an entire cellar-full of salt.
Anyway, that’s got very little to do with today’s topic, but it’s always nice to have a chuckle first thing in the week. Particularly as we’re all now getting worried about second waves, it seems.
Covid-19 is making a comeback in the US
Markets have had a wobbly couple of weeks. You can never know precisely why markets are doing anything, but you can usually take a good guess.
The most obvious factor is that we’re seeing a fresh spread of coronavirus in many US states. This seems (so far) to be down to the fact that America locked down less effectively than most European countries.
As John Authers points out in his Bloomberg newsletter, a comparison of the rolling average of new cases paints a pretty damning picture of America’s handling of Covid-19 relative to Europe’s. The average number of new cases in the US is now higher than it was at the initial peak in April, whereas Europe has so far managed to keep the virus in check.
This is bad news, absolutely no doubt about it. Even if the US refuses to go into lockdown again, you have plenty of knock-on effects. If Covid-19 cases are rising, you’ll have “voluntary lockdown” – where people just don’t go out as much. And if the biggest economy in the world is still swarming with the virus, then the impact on the global travel industry will be drawn out for much longer.
So it makes complete sense for markets to worry about the rising caseload.
Does that mean we could see European stocks outperform the US? That’s not so obvious. Arguably the biggest driver of US outperformance has been the stocks that would have done well under Covid-19 anyway – the big tech stocks – so I suspect all that will really happen is that US stocks (as the current dominant market) will just lead everyone else somewhat lower.
Why investors might fear a Joe Biden victory
Another worry – one that’s less obvious but might have a bigger impact as we approach November – is that Donald Trump may lose the next election.
Now let me be clear, I’m not someone who’d be sad to see the back of Trump and nor do I think it’s a raging certainty that he’ll be voted out, not by a long way. But the odds are increasing that Joe Biden and the Democrats will win in November. That means stockmarkets should be increasingly pricing that scenario in. And the reality is, it’s not obvious that a Democrat win would be good for markets.
Trump’s tax cuts? Not likely to survive. That means lower earnings, which should mean lower share prices. So that’s another drag on US stocks, and by extension, the world.
What does it all mean for an investor like you though?
Again, I have to say, not a lot. We’re not trying to time the market’s every little surge and dip. For me, the big picture here is still the same.
Is the global financial system going to collapse and leave us in a deflationary black hole? No, I don’t see that outcome, which means I don’t think it makes sense to have all of your money stuffed under the mattress.
Instead, in the longer run I feel that we’re going to see lots more government spending, which one way or another, will have to be funded either by central banks, or by investors who believe that central banks are ready and willing to print the money to buy the bonds back from them.
This week, for example, it appears that the UK is about to launch a big infrastructure spending programme. For all of the vague hints that Rishi Sunak (like everyone who works in the Treasury) is a bit worried about the level of spending, Boris Johnson has already said that the government will "not go back to the austerity of ten years ago”.
Will the money be well spent? Hopefully yes; experience rather suggests it won't, however. But the point is not whether it’s well spent or not, it’s the fact that it’s being spent at all.
And the reality is that we’re going to see something similar in the US. If there’s a second wave and further lockdown, we’ll just see more of what we’ve already had – more generous benefits, extended furloughs, all the rest of it.
And this’ll happen on a rolling basis until something happens to make it stop. The only thing that’ll do that is out-of-control inflation. And we’re a while away from that.
So as ever, it makes sense to stick to your plan. Have a diversified portfolio. Have a watchlist of things you would like to buy cheaper. Save regularly. Try not to get too stressed or monitor your portfolio to the point where you can’t sleep at night.
We'll have more on all this in the next issue of MoneyWeek magazine (get your first six issues free here if you’re not already a subscriber).
And if you’re an income investor, don’t miss our webinar with challenger wealth manager Netwealth this Thursday, when I’ll be talking to Iain Barnes and Matt Conradi about how to generate a sustainable income from your portfolio in an era of low interest rates and dividend destruction – not to mention a potential recovery in inflation. Sign up here to watch it live (and ask questions), or view the recording later.