SINGAPORE (June 12): Financial markets, which were poised to enter the second half of the year with a “second wind” beneath the wings, have been doused with cold water. The spectre of a “second wave” of Covid-19 cases has grown as more locations lifted lockdowns in varying degrees, thereby allowing the virus to spread.
This past week, three major US states reported a higher number of confirmed Covid-19 cases. A month into its reopening, Florida reported 8,553 new cases — the highest weekly number to date; California’s hospitalisations are at their highest since May 13. And on June 10, Texas reported 2,504 new cases, the highest one-day total since the Covid-19 outbreak started.
Earlier in the week, market experts were betting on a “second wind” to carry markets even higher. The “wind”, of course, is generated by the unprecedented trillions in stimulus from policy-makers and central banks across practically every major economy.
The markets have reacted to the most recent Covid-19 data from the US. On June 10, the Dow Jones Industrial Average (DJIA) dropped 282.31 points, or 1.04%, to close at 26,989.99 points. The S&P 500 dipped 0.53% to 3,190.14 points. Asian markets made a U-turn the following day, as well. The Straits Times Index gave up 96.36 points, or 3.44%, to close at 2,704.21 points on June 11.
Prior to this, the steep plunge in share prices in March was quickly replaced by the remarkable recovery in April and May. Investors were adopting the “buy first, justify later” and fear-of-missing-out mentality. They downplayed the growing disconnect between economic data and financial markets.
On June 10, the US Federal Reserve guided that its near-zero rates will remain until 2022. “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates,” says US Fed chairman Jerome Powell.
See also: Bitcoin’s Trump-inspired rally is bad news for Korean small-caps
“The Fed’s stance and its view of the economy and disinflation risks broadly affirms a world with lower-for-longer rates, which underpins our view that the search for yield will continue to be a powerful market driver ahead,” says Eli Lee, head of investment strategy at Bank of Singapore.
Along with this guidance, the Fed is also forecasting that the US economy will recover by 5% in 2021, which follows a 6.5% contraction seen this year. Some commentators say this is the V-shaped recovery that investors are punting on, but others see this as more akin to a Nike swoosh.
With the most recent data, some market experts are urging caution. Beyond the debate over whether the recovery is a “V”, “U”, or “Nike”, there are structural differences that will widen. From the perspective of Paras Anand, chief investment officer, Asia Pacific, of Fidelity International, different companies will react differently in this new environment.
See also: That's what friends are for
Some companies will go about their business barely missing a step while others will be permanently floored. “The average will matter less; trying to understand the direction is going to be less valuable in the future than in the past,” he says.
One clear stand-out example is the tech sector. Businesses and individuals were quick to adopt digital services and processes during the lockdowns. This kept the supply chain for servers, notebooks and other essential technology equipment intact while demand for cloud computing services continued to grow.
As such, there is no surprise that the tech-heavy Nasdaq Composite chalked up a record high again. It crossed the breath-taking 10,000-point mark on June 10, even as the broader DJIA and S&P 500 corrected. Out of the nine previous sessions, the Nasdaq was up in all but one. Year to date, it is up nearly 10%.
Other than the discrepancies across different sectors, another risk comes in the form of the US consumer, warns CIO and head of investments at Pictet Wealth management César Pérez Ruiz.
Four out of five Americans who have lost their jobs recently are optimistic that they will get those jobs back within three months. But what if the recovery is not firm enough?
This will dash hopes of re-employment and curtail US consumption spending. Will they continue spending? Will they cut back entirely? Will they borrow and spend? “How they react is what we are going to watch,” he says.
Ruiz also notes that markets are full of expectations that the pharmaceutical companies can produce a vaccine by the end of the year; he sees an 80% chance of them doing so. Progress at the laboratories is closely watched and widely expected, he says. In short, it is easy for investors to be disappointed if the science fails to live up to expectations.
In any case, the world economy is set to become a very different place (see Page 5). “Monetary and fiscal policies have been unprecedented, and many rules broken,” says Ruiz.
The unprecedented stimulus from the governments has largely gone towards making up for people’s lost income, but the earnings of companies that have been decimated by the pandemic’s fallout may not recover. Then there is also the question of dealing with the eventual costs of the massive stimulus packages.
“This is not a free lunch. For years to come, who will pay for that bill?” asks Ruiz.
