Will a second wave of Covid lead to another stockmarket crash?

Can we expect to see another lockdown like in March, and what will that mean for your money? John Stepek explains.

After a brief, limbo-like period of semi-respite, Covid-19 is hitting the headlines again. 

Everything’s in chaos. Testing is simultaneously useless, but also the reason that we know that cases are going up (yes, that confuses me too – more on the shaky reliability of testing here).    

So how bad is it and what does it mean for the economy?

Are we heading for another full-on lockdown?

Travel stocks have been falling hard this morning (again) amid concerns that we’re going to get new lockdowns and quarantines imposed across the UK and Europe. 

I just had a look at easyJet’s share price. It’s down about 7% this morning; down almost 40% from its post-corona peak in early June; and down about 64% from its pre-lockdown 2020 high point in early February.    

That’s a quite a drop. And it’s no surprise. It’s one thing to have missed the summer holiday season. But now half-term is probably out of action, along with the winter holiday season. This goes on for much longer, and you start to wonder about Easter 2021 and maybe even next summer too.  

Of course, travel stocks may be pricing a lot of this in by now. (And in fact, we’ll be taking a look at that topic in MoneyWeek magazine very soon – subscribe here.)

But I want to look at the wider question – are we heading for a new lockdown, and if that’s the case, then does that mean we’re also heading for a new stockmarket crash like the one we got in March? 

I’m going to give you my answer upfront: probably not, and no. 

Now I’ll explain why and you can see if you agree or not. 

When I say we won’t get a new lockdown, what I mean is, I don’t think we'll get one like the total shutdown we had earlier this year. 

The government wants people to get back to work. It wants kids to stay at school. Why? Because if you don’t get the economy back to something approaching “normal”, then all of the damage that’s already been done will just get entrenched. 

There are individual sectors – like the travel sector – which will suffer for some time, regardless. But you don’t want to compound that by keeping everything else closed as well. 

There is no question that the government is flailing around in a clueless manner. This “six people limit” business is stupid, authoritarian and poorly communicated, for example. 

But you can see the underlying logic. Work places and schools are largely “controlled”, in that they’ve all been told that they have to have plans in place for enforcing social distancing. Now anyone with half a brain knows that this is mostly a box-ticking exercise, like every other backside-covering bureaucratic bit of nonsense that plagues both our public and private sectors. But the box is ticked. 

When people meet privately – well, there’s no way to ensure compliance. So you keep them to some sort of arbitrary number.   

Again, it’s nonsense. But the government is “seen” to be “doing something”. And if it can do that while avoiding a full lockdown, I think that’s what we’ll continue to see. 

Forget confidence – here’s what really drives the economy

So what does that mean for the economy? 

It’s tempting to focus on “confidence” and “animal spirits”, because we can all do it. Every cod psychologist with an opinion can spout off about how people feel, and how that affects their behaviour. We can all build scenarios and tell anecdotes about what happens if we’re too scared or confused to leave the house. 

But it isn’t helpful. If you’re interested in the economic impact of anything, don’t worry about “confidence”. Just ask: “do people have money right now?” If they do, they’ll spend it. If they don’t, they won’t. And remember that money takes lots of forms. Credit is a form of money. When people have easy access to it, they’ll spend that too. 

So, do people have money? Yes. You need only look at what’s happened during lockdown. Retail spending has now recovered to above where it was before lockdown. What we’re not spending on trips to Ibiza we’re spending on dishwashers. 

(And what we’re not buying in John Lewis, we’re purchasing in Next, it seems from the latest results from those retailers.) 

Will that continue? Quite possibly not. Once furlough ends and government support ends, a lot of people suddenly won’t have money. That’s why governments (and not just ours) need to get the economy back up and running to as great an extent as possible. As it stands, there will be a lot more unemployment. What they need to do is to make sure that any income shock is as contained as possible. 

So, do governments anywhere in Europe or the US want to go into another full-blown lockdown? No chance. 

In all – given that markets in the eurozone and in the UK are a good deal cheaper than in the US – I’m not particularly worried that there will be another crash. Indeed, you should probably have exposure to these markets in your portfolio.  

Oh, and regardless of your views on the efficacy of lockdown, you should listen to this podcast with James Ferguson of MacroStrategy Partnership. It’s clear that there are serious issues with the reliability of tests which throw all the stories about surging cases into a slightly more complicated light. 

We have a lot more on the topic in the latest issue of MoneyWeek magazine – including a contrarian bet on one of the hardest-hit sectors in the UK – out today. Pick up your first six issues free here.

Recommended

Think Tesla is a bubble? This might be the best way to bet on it bursting
Oil

Think Tesla is a bubble? This might be the best way to bet on it bursting

The huge rise in Tesla’s share price means that, by market value, it’s now the sixth-largest company in the US and and the world’s biggest car-maker. …
25 Jan 2021
Three clean energy stocks for your portfolio
Share tips

Three clean energy stocks for your portfolio

Professional investor Christian Roessing of the Pictet Clean Energy Fund highlights of his three favourite stocks at the forefront of the clean energy…
25 Jan 2021
The MoneyWeek Podcast: let's talk about bubbles
Stockmarkets

The MoneyWeek Podcast: let's talk about bubbles

Merryn and John talk about the many obvious signs of a bubble in certain assets, including tech stocks, TikTok, and stock-trading 12-year olds. It's c…
22 Jan 2021
Inflation is the easiest way out of this – just don’t expect politicians to admit it
Inflation

Inflation is the easiest way out of this – just don’t expect politicians to admit it

The UK government borrowed £34.1bn in December, a record amount for that month. Britain's debt pile now amounts to 100% of GDP. How are we going to pa…
22 Jan 2021

Most Popular

The FTSE 100 is set for a makeover with an influx of new tech stocks
UK stockmarkets

The FTSE 100 is set for a makeover with an influx of new tech stocks

The FTSE 100 – the dullest index in the world – is about to reinvent itself as a host of new firms list on the market. The change is long overdue, say…
24 Jan 2021
Think Tesla is a bubble? This might be the best way to bet on it bursting
Oil

Think Tesla is a bubble? This might be the best way to bet on it bursting

The huge rise in Tesla’s share price means that, by market value, it’s now the sixth-largest company in the US and and the world’s biggest car-maker. …
25 Jan 2021
Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021