Potential for further outbreaks weighs heavy despite cautious signs of economic recovery
Investors are back on high alert after volatility reared its ugly head and fears grow about a second wave of the COVID-19 pandemic.
AGF’s CEO and chief investment officer Kevin McCreadie has warned people not to get complacent despite the “tug of war” between good and bad news. Record-breaking U.S. retail sales figures and announcements of new government stimulus may have pushed markets higher but the pandemic is showing worrying signs of new life.
At least 21 states in the U.S. are now experiencing an increase in average daily new cases, while hospitalizations have increased since Memorial Day by more than 100% in some states like Arkansas and are at record levels in other states like Texas and Arizona. Other countries are also experiencing surges in the virus, including China, which re-introduced lockdown measures in Beijing after a new cluster emerged from one of the city’s larger food markets earlier this month.
McCreadie said: “It makes sense that investors are back on high alert as they weigh the strength of the economic restart to date against the potential impact further outbreaks could have on the economy going forward and the next few weeks are going to be a lot more volatile than has been the case, really, since the end of March when stocks bottomed, and the rally began.”
The CEO said the market was likely overbought before the recent because too many were overly enthusiastic about the strength of the economic re-start and new job stats which, while encouraging, rather concealed the fact the unemployment rate was still at 13%.
The market, therefore, did not tally with the actual situation and investors are now being forced to re-assess their assumptions about how quickly and seamlessly the economy can recover. As U.S. Federal Reserve Chairman Jerome Powell has been soberly noting of late, it could be a long time yet before the U.S. economy is back operating at full capacity.
Meanwhile, recent trading has been dynamic and McCreadie is watching closely to see whether this trend persists.
“Despite the need to remain cautious about the economic re-start, there’s no question that the global economy is beginning a nascent recovery, but there’s also been a fair bit of speculation at play and it’s perhaps no coincidence that retail participation has not been this strong since the 1990s.
“If you recall, it took years for retail investors to jump back into markets in any substantial way following the financial crisis in 2008-09, but day trading has proliferated this time around, much like it did during the dot.com era. Whether this latest proliferation ends up creating a similar bubble to then remains to be seen and may depend on whether the trend persists longer term, rather than fading out as other facets of daily life return to normal.
“Still, if there’s been any froth in the market, it has not been driven by long-only institutional investors, who have remained much more cautious about the rally than their retail counterparts to date.”
The strength of a possible second wave and the strength of the economic re-opening will all dictate how equity markets perform over the coming months. The seemingly endless amount of fiscal stimulus looks set to keep investors propped up, too.
“The stimulus response has been a critical component of the rally off the bottom and more support is likely on the way. In the U.S. for example, a US$1-trillion package of additional aid is in the works to support small businesses and those unemployed due to the virus and then, markets moved higher this week on reports that the Trump Administration is considering a $1-trillion infrastructure spending program. The European Commission, meanwhile, has recently proposed a €750-billion recovery fund and other countries including Japan have also announced additional stimulus to prop up their economies in recent weeks.
"All in all, these types of fiscal measures should remain an important catalyst for stocks for as long as the need for them continues to offset the potential long-term consequences of the massive debt burden that is piling up.”