Macro Update - 06 July 2020

Will the markets ride the US second wave?

Will the markets ride the US second wave?

  • The US gets hit by a second wave of infections but employment jumps by nearly 5 million in a single month.
  • As the UK eases its lockdown further, we leave the pub to examine whether there’ll be a second wave here too.
  • And we ask the biggest question of all: after markets head higher yet again, is this the time to breathe a huge sigh of relief, bank those gains and get off the risk-on, risk-off roller coaster?


Most populous states show strong rise in cases

Let’s begin with the US. What started as an epidemic centred on New York and other North Eastern states has moved south and west and increasingly the mid-west. Texas, California, and Florida, the three most populous states, are amongst those in the US where new cases are showing a strong rise. Lockdown exits have been delayed or reversed.

My data on restaurant reservations and mobility show a decline or flattening of the economic recovery in the most affected states. So how come the US added so many jobs in June and how did unemployment fall when initial unemployment claims have soared? The answer is timing and the generosity of the US fiscal package. Many people across the US are getting paid more in unemployment benefits than they could earn by working, so it’s not surprising that so many have claimed benefits. And the payroll report was conducted in the week ending 12 June, before the ‘sun belt’ states went into retreat.


All eyes on Congress

There is no doubt that the authorities in many US states have handled the virus badly and their people and economies will suffer. But it’s not all bad news; new infections are focused on the young, treatments are improving, and things are much better in the north eastern states. We’ll be watching closely to see if Congress comes up with another massive budget package – many of the existing measures expire at the end of the month, and a failure to propose any continued support would be bad news indeed.


News in the UK is more positive

Meanwhile, as pubs open in the UK and the Chancellor of the Exchequer, Rishi Sunak, prepares to unveil another fiscal package, the latest data on the virus from the Office of National Statistics provides a much needed boost for the government.  Their survey is of the community, not just those in care homes or hospitals, and that helps us to understand how prevalent the disease is amongst the general population. And out of over 20,000 people tested, only 12 had Covid-19. The numbers have fallen dramatically since April. The pace of decline has levelled off and is likely to rise after the usual lags as the lockdown is eased. But those experts who warned that we were exiting too early did so because they thought the number of cases in the community was much higher. So, with a bit of luck the second waves will be controllable. Isolated clusters, like the one in Leicester, are actually encouraging, as resources can be concentrated in that area. What’s critical is that we avoid another national lockdown.


Pessimism provides positive potential

At the global level, economic data is coming in much stronger than expected but forecasters have been slow to upgrade their predictions – as they were on the way down. Corporate earnings estimates for this year have been slashed but I reckon the next move is up. And let’s not forget that financial conditions are highly supportive with government bond yields so low. Yes, valuations aren’t great but when I see investor sentiment surveys that are so bearish, I’m encouraged. It’s much easier to have positive surprises when pessimism reigns. I get much more worried when investors are euphoric.


Year-end forecast

That’s tricky. When I turned tentatively bullish in late March, there appeared to be considerable upside. When the rally got going, I mentioned 3,000 as a reasonable year-end target for the S&P 500. Well, we blasted through that level in late May. So, does that make me bearish? Not at all – when news flow is positive, financial conditions are supportive and investors are bearish, I think risk assets tend to rise. Don’t get me wrong, the bulk of the gains are behind us and there’ll be setbacks along the way, but I do think it’s time to be fully invested.

Steven Bell

Managing Director, Portfolio Manager & Chief Economist, Multi Asset Solutions


Risk Disclaimer

The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

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