Summer holidays are over in the UK and it’s back to school for many. August is often a turbulent month for markets, but this year was an exception. The S&P 500 was up 7% on the month, the best performance since 1986. The rise was relentless; there were only 5 down days. The NASDAQ was up by almost 10%, it is now up by 31% year-to-date. The US outperformed all the major equity markets. The FTSE 100 managed only +1.2% but, as a measure of how detached that index is from the UK economy, we note that the FTSE AIM All-Share was up by 10%.
This good performance cannot be traced to positive news on the virus. Lockdowns are being re-imposed, albeit selectively, from South Korea to Spain. A second wave is gathering force in France too, and a somewhat chaotic response in the US means that many states are still suffering an acceleration of infection rates.
Why are markets shrugging off negative news flow?
First, markets are responding to signs of very strong recoveries from the deep recessions that followed the emergence of the pandemic. This is feeding through into corporate earnings, which beat depressed expectations by a record amount in the Q2 reporting season.
Second, financial conditions are highly supportive, with very low interest rates – the 10-year US TIPS yield hit a record low of -1.10% on 31 August.
Third, and most important, there has been very good news on the medical front. Treatments are getting better, and there are signs are more widespread immunity. But most important of all, is the prospect of a breakthrough on a vaccine. As we have discussed many times before, the Oxford vaccine has been in Phase III trials since June. We expect this phase to reach a conclusion soon, in a couple of weeks or so. The results then go to a huge panel of international experts who will take up to a month to analyses and discuss the data.
A potential vaccine schedule looks positive, but not for Trump
All being well, and assuming the vaccine works, we would then have the all clear to move ahead with a mass vaccination programme by November in the UK. President Trump is desperate to get the vaccine in time for the US elections on 3 November. He’ll be deeply frustrated at the thought that the current timetable means that he may well miss the boat.
As far as the UK is concerned, there is a massive plan being hatched in Whitehall to distribute the vaccine – retailers will be asked to switch their chilled food distribution transport from yoghurts to vaccines. Polling stations will be used to administer the vaccines. Just imagine if the entire population had one, possibly two doses over the next few months.
This really would be a game changer, and provides a positive background for risk assets and a negative outlook for bond markets. Central banks will keep interest rates low for an extended period but the prospect of further cuts will recede – watch out for this month’s Fed meeting though.
Beyond the virus
There’s been strong economic data out of the US. We look ahead to the employment data on Friday. There’s been movement on the political front too. The continued unrest in the US with another highly publicised shooting of a black man by a white policeman has played into President Trump’s hands as he focuses his whole campaign on law and order. The betting markets no longer see the Democrats as favourites to regain the Senate – it’s 50:50 now, and Biden has also lost some of his lead in the Presidential race.
Meanwhile in the UK, there is mounting evidence that we are enjoying a strong economic recovery. Much stronger than many feared, and our second wave seems to be much milder than anticipated. Indeed, the comprehensive community survey by the Office for National Statistics shows that despite a slow rise in new cases as conventionally measured by the government, the rate of infection among the entire general public is not rising and remains very low – just one person in 2000. And 80% of those tested positive have no symptoms.
There’s a long way to go before we regain pre-virus levels of economic activity. Without a vaccine, it would be a very distant goal. With a vaccine, and with so much policy support, it could happen rapidly. Life may never be the same, but the extraordinary restrictions on our daily lives could be over, and potentially much sooner that many had imagined.