Navigating the interplay between rising COVID-19 cases and improving mobility trends
Rising new COVID-19 cases in the US and muted reaction from equity markets: A disconnect? New COVID-19 cases in the US are on the rise again. After initially peaking in late-April, new cases were on a steady decline. But since mid-June, the situation has changed with new cases heading north – a situation which is not unanticipated. We are cognisant of the risks surrounding second (or multiple) infection waves given recent economic reopenings, and while the infection curve in New York has flattened, the curves for Texas and Florida are steepening (Figure 2).
However, despite the upturn in new cases, its impact on the S&P 500 Index remains muted (Figure 1). Equity markets are anticipatory and forward looking in nature. Back on 16 March when the US daily infection rate first crossed the 1,000 mark, the S&P 500 had already started its correction one month earlier (down by 29.4% between 15 February and 16 March). None of this is happening in the latest resurgence. While new US cases have been rising since 14 June, the reaction on the S&P 500 remains muted.
A disconnect? Not so, in our view.
Barring a blowout in the number of new cases globally, it is the risk of lockdowns that markets are concerned about. Market commentators have commonly associated rising new COVID-19 cases with equity market selldowns. This is inaccurate in our view. We believe the main concerns are focused on whether these new infections will translate to lockdowns and by extension, macro and corporate earnings weakness.
When the virus first started becoming an issue in the US, risk assets sold off as investors expected stringent economic lockdowns to be imposed (like what China did). That indeed transpired and the months of large-scale quarantine have resulted in unprecedented economic contraction and unemployment in the US.
But the situation has changed. Recent narratives from US governors clearly suggest that quarantine fatigue has set in and the political will to impose another round of blanket lockdowns has all but dissipated.
The prevailing train of thought is: Economic livelihood matters too.
Figure 1: S&P 500 remains muted despite resurgence of new cases in the US
Source: Bloomberg, DBS
New infection data matters less (for now); focus attention on macro and mobility data instead. In the coming months, markets will instead be focusing attention on incoming mobility, macro, and corporate earnings data. Based on the latest numbers from Google, mobility in retail and recreation in the US has continued to improve. This will translate to stronger consumer demand and its impact is already showing up on official macro data. US advanced retail sales, for instance, has rebounded from -15.2% m/m in April to +17.7% m/m in May, beating consensus forecast of a 8.4% m/m gain.
Barring a complete U-turn in rhetoric among US policymakers with regards to re-impositions of lockdowns, markets will continue to track the “second derivative” of mobility, macro, and earnings data in the second half of 2020 (Figure 3).
With unprecedented policy backstop, a repeat of Feb-Mar’s selldown is not likely. Being fully mindful of COVID-19’s detrimental impact, we believe policymakers will continue to lend full support to the economies, both from a monetary and fiscal perspective. The US Federal Reserve, for instance, has pledged that rates will stay lower for longer and the US government is also exploring the plausibility of a trillion-dollar infrastructure programme.
Against this backdrop, we do not expect a repeat of Feb-Mar’s market selldown to be on the cards. In the coming months, we recommend investors to stay invested and focus on industries and companies that will benefit from the post-pandemic environment.
Figure 2: While the infection curve in New York has flattened, the curves for Texas and Florida are steepening
Source: Bloomberg, DBS
Figure 3: Mobility trends in the US have continued to improve
Source: Google LLC "Google COVID-19 Community Mobility Reports"
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