Numerous countries are experiencing second waves of COVID-19 infections – not that you would know from their equity market performance. Take the US. Its second wave (or acceleration of the first) started towards the end of May and ended in early July. Over that period, stocks were still up around 6%. Admittedly, there was a short-lived correction of 7%, but that was considerably smaller than the 34% decline seen around the first surge in cases (Chart 1).
Outside of the US, a number of countries are experiencing second waves from Poland to Hong Kong to Australia. Yet their equity performances have not been too different to countries without second waves. On average, second wave countries have seen their stocks rise 4.5% over the past two months. This compares to 5% for countries either still in their first wave or having flattened the curve. Therefore, you would be hard-pressed to discern whether a country is experiencing a second wave from relative equity performance.
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Numerous countries are experiencing second waves of COVID-19 infections – not that you would know from their equity market performance. Take the US. Its second wave (or acceleration of the first) started towards the end of May and ended in early July. Over that period, stocks were still up around 6%. Admittedly, there was a short-lived correction of 7%, but that was considerably smaller than the 34% decline seen around the first surge in cases (Chart 1).
Outside of the US, a number of countries are experiencing second waves from Poland to Hong Kong to Australia. Yet their equity performances have not been too different to countries without second waves. On average, second wave countries have seen their stocks rise 4.5% over the past two months. This compares to 5% for countries either still in their first wave or having flattened the curve. Therefore, you would be hard-pressed to discern whether a country is experiencing a second wave from relative equity performance.
So, even though COVID-19 horror stories continue to fill the media, markets are looking through this. Why? First, the death rate and hospital usage are much lower than at the beginning of the outbreak, and treatments have improved dramatically. Second, there have been significant advances in the understanding of virus – both from the perspective of the medical profession and investors. The wild projections of millions of deaths in major countries turned out to be incorrect. Third, the scale of lockdowns has become much smaller, so businesses are better able to operate even with higher caseloads.
But perhaps most important is that vaccine development has occurred much faster than anyone would have predicted. There are now two vaccines in use: that of Russia’s Gamaleya Research Institute and that of China’s CanSanoBio. The latter is also being used in Saudi Arabia. While there is some uncertainty around the viability of these vaccines, a Western-produced vaccine (from America’s Pfizer and Germany’s BioNTech) could have their data ready for the FDA in early October, which could set the stage for its deployment.
We highlighted the possibility of an early vaccine breakthrough in an earlier analysis and in a podcast. And prediction markets have now dramatically raised their odds of an FDA-approved vaccine before 2021Q2 – currently at 70% compared to 20% in May (Chart 3).
The bottom line, then, is that markets are looking through spikes in COVD-19 infections and instead focusing on the more optimistic news, whether that’s on treatments, vaccines or softer lockdowns.
Chart 1: US markets reacting less to second waves
Chart 2: Odds of vaccine breakthrough before 2021 Q2 is high
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)