COVID-19 Market Update: Two Steps Forward, One Step Back
Major equity indices ended the week mixed with the US equity markets in modestly positive territory (S&P up .19%), Canadian somewhat negative (TSX -.07%), and European markets softer (EAFE -2.6%). The technology-loaded Nasdaq maintained the performance lead over other indices (up for the week .79%) with a year-to-date (YTD) return of 30.1%, followed by the S&P 500 YTD 7.83%, followed by the TSX still in negative territory at YTD -3.7%. EAFE is losing 8.2% year to date, and the broader-based US equity indices, S&P Midcap 400 and the Russell 2000 are lagging at -3.18% and -2.08%, respectively.
Large-cap stocks continue to dominate this week led by industrials and technology. Over the next few weeks, third-quarter earnings results are expected, with analysts polled anticipating earnings to fall 20% year-over-year. Hopes of a US stimulus package before the election are fading. The Senate’s offer of $500 billion is acutely short of both the White House’s $1.8 trillion and the House’s $2.2 trillion. The stalemate continues as the polls predict a Democratic White House victory at hand, giving impetus for House Leader Pelosi to holdout despite potentially jeopardizing seats in contested districts.
The economic rebound so loudly promoted by US President Trump based on the financial indicators is losing some of the second quarter vigor. Core retail sales rose 1.4%, excluding autos, home centers, foodservice suppliers and gas stations. This is up from the August contraction of 0.3%. Initial jobless claims rose to 898,000 from the previous week of 840,000; however, the continuing claims fell to 10.1 million from a revised 11.2 million. Core consumer prices (ex-energy and food) moved 0.2% higher in September. Rising COVID-19 cases reenforce the need for masks, social distancing, and returning lockdowns in targeted areas. Vaccine news is two steps forward and one step backward, diminishing hopes of a proven vaccine before sometime next year.
Last week, two news items were briefly noted by the media worthy of mentioning as attention grows over the resentment and efficacy of economic lockdowns. The first was the Great Barrington Declaration, written by three highly regarded academic medical doctors from Harvard University, Oxford University and Stanford University. First published on October 4, it was co-signed within days by 3,200 fellow medical doctors and scientists. Since then, the number has grown to 10,473 medical and public health scientists, 28,815 medical practitioners and 524,107 concerned citizens. The underlying theme is the cure is worse than the disease. Their consensus is “current lockdown policies are producing devastating effects on short-and long-term public health.” Further, “those who are not vulnerable should immediately be allowed to resume life as normal, as keeping these lockdown measures in place until a vaccine is available will cause irreparable damage, with the underprivileged disproportionately harmed.” And “as immunity builds in the population, the risk of the infection to all – including the vulnerable – falls. We know that all populations will eventually reach herd immunity – i.e., the point at which the rate of new infection is stable – and that can be assisted (but is not dependent upon) a vaccine.”1 The second important item worth mentioning was an interview with Dr. Nabarro, the WHO’s Special Envoy on COVID-19. During the interview, he appealed to all world leaders to stop using lockdowns as the primary control for COVID. He estimated that we might well have a doubling of world poverty by next year and a doubling of child malnutrition because children are not getting a meal at school. He is another voice recommending reengagement of economic activity.2
The response to the virus needs to be reconsidered because of what has been learned since we first became aware of COVID-19. Returning to normal is not going to be easy and likely many years away, especially in light of comments from proponents using COVID-19 as an opportunity to reset global economies.
It is said that a market ignoring bad news is a market with internal strength and should be good news for investors. In the current environment, market strength is driven, in the case of the US, by just a handful of stocks benefiting from changes in behaviour responding to government-mandated lockdowns and fear of COVID. Additionally, historic low interest rates force global fund flows into equities, private equity, private debt, and other strategies having low or no correlation to equities for return and capital preservation. If there was ever a period for embracing caution and alternative thinking, we have entered such a period.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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