Here's what the market is saying about rising coronavirus cases and the economy
Florida, once a role model among states preparing to release lockdowns, has now become a warning story. It connects California, Arizona and Texas in a number of areas where coronavirus cases are recurring.
Even so, a volatile Wall Street, which is still prone to cuts, remains firmly anchored in a bull market supported by aggressive incentives from the US government and the Federal Reserve. The market's Helter-Skelter tone largely reflects the competing impulses of a nationwide surge in COVID-19 diagnoses and expectations for an economic recovery.
For weeks, analysts have been complaining about the dichotomy between Wall Street and a real economy. Paul Schatz, President of Heritage Capital, told Yahoo Finance this week that current prices are not separated from economic reality at all.
"The market action reduces economic activity 3-6 months later," he said. "Although the short-term mood is frothy ... long-term investors ... are still huddled with cash in their bunkers with bottled water and spam," joked Schatz.
A closer look suggests that investors are less optimistic about a “V-shaped” recovery than a pragmatic view of political and epidemiological realities as COVID-19 continues to take hold of the global economy. With new concerns about breakouts and the scratchy rally of the market in the face of chaos, the markets are making two precarious assumptions.
They believe that rising coronavirus cases will not overwhelm hospitals that are now better prepared than during the first wave, and that there is virtually no political will to return to the restrictive barriers that marked March and April.
Jan Hatzius, chief economist at Goldman Sachs, said on Friday that "there is likely to be a major hurdle for states to reinstate locks." The capacity of the hospital, not the growth in cases, is likely to be the factor that could force state and local officials to halt or reverse plans to reopen. "
He added, "Although the proportion of inpatient hospitalized patients treated for COVID-19 remains low, we believe that this and related data are among the most important in assessing whether a state is pausing its reopening plans, could change or undo. "
Mark Haefele, chief investment officer for global wealth management at UBS, wrote in a research note that the increasing COVID-19 outbreaks “are still small in relation to the capacity of health systems. Meanwhile, local, state, and federal officials have largely rejected a return to restrictive barriers, he added.
With resilient consumers and advances in vaccine development, the recovery "will gain strength next year," added Haefele - even though fears of the second wave increase market volatility.
Cases outside of New York are increasing. (Graphic: David Foster / Yahoo Finance)
The "jagged swoosh"
The downside risks associated with growing COVID-19 fears were exposed on Friday when Apple (AAPL) announced it would be cautious about doing business in some markets - which shook stocks.
The momentum reflects the “new phase” of the market, said Matt Miskin, Co-Chief Investment Strategist at John Hancock Investment. He told Yahoo Finance this week that asset prices would likely be traded like a "biotech stock" whose assets are based on a promising drug.
"It's a behavioral finance study. What really happens is when you invest in a drug. They usually start by saying that a drug is promising and the stock goes up a ton." Just to reverse it if the reality undermines optimism.
It has now become clear that the happy medium between a still angry outbreak and an emerging upswing is what analysts at the Eurasia Group have recently described as a “jagged swoosh” recovery.
"The interplay between pandemic and political decisions ... [creates] a jagged Swoosh recovery that takes longer than the U- or V-shape recovery, which characterizes more benign scenarios and probably reflects the different pace or recovery across states and sectors" , wrote Robert Kahn, the company's Global Strategy and Macro Director.
"The ongoing headwind to supply and demand and the resulting financial hardship are contributing to persistent activity bottlenecks," he added. "Unemployment remains high and it takes 2-3 years for activity to return to the pre-pandemic level."
Eurasia responded to the prospect of a new round of deadlocks and repeated a growing number of economists, who indicated that the scenario "will be more difficult to implement than expected because political support for the reopening is surprisingly strong and unlike in the early days of the pandemic The need for government shutdowns ... is considered limited when virus outbreaks are concentrated in small pockets. "
This assumption is a gamble for both Wall Street and the economy. Because COVID-19 is not used until a vaccine is found, the prospect of flare-ups in certain countries and the ability of officials to curb the disease are critical.
JPMorgan Chase economist Jesse Edgerton said on Friday that "We believe COVID-19 and its behavioral impact remain the primary drivers of the economy in 2020."
Given record-breaking hospitalizations and infections in the Sunbelt and California states, although former epicentres in New York and New Jersey are declining, the bank believes that patchwork of national policy is not enough to catch the virus eliminate, and the fear of COVID leaves -19 as a significant burden on activity in certain sectors, "said Edgerton, adding that" recent data on the interaction of COVID-19 and activity are consistent with our forecast for a partial recovery. "
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