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Rising-COVID-19-Cases-Could-Pressure-the-Recovery

Rising-COVID-19-Cases-Could-Pressure-the-Recovery

November 23, 2020
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COVID-19 cases have been rising in several regions around the world, prompting many countries to implement new restrictions to curb the spread of the virus. Governments in a few European countries have rolled out what has been dubbed “lockdown 2.0,” and high-frequency data in the region, highlighted in our blog Europe’s Lockdown 2.0 May Be Smarter, has shown a reduction in economic activity. While new restrictions are more targeted than those used in the spring, economies currently are in a more fragile position and some could even be at risk of a “double-dip” recession.

As shown in the LPL Chart of the Day, COVID-19 data in the United States has gotten worse in the fourth quarter. With conditions deteriorating and the weather getting colder, there is a growing risk that more restrictions will be enacted in the United States as well.  California and New York have already implemented some initial rollbacks such as nighttime curfews and school closings, while additional measures are being considered elsewhere.

View enlarged chart.

The US economy appears to be in a better position to withstand these curbs than it was in the spring, but unemployment remains high at 6.9%, and economic data for service-oriented industries has shown fading momentum in recent months. If the uptick in jobless claims last week is the beginning of a trend, consumer spending may decline, which could affect roughly 70% of the US economy.

“The worsening trends in COVID-19 data present a very real risk to an economy that remains on soft ground,” noted LPL Chief Market Strategist Ryan Detrick. “While recent news on vaccine progress has been a welcome development, the actual rollout of a vaccine could take longer than people realize.”

Even without new lockdowns, it appears that consumer behavior has already begun to react to the rise in cases, presenting a risk to economic activity regardless of any policy decisions to curb activity. Real-time data series like restaurant bookings through OpenTable have been declining in recent weeks, particularly since the acceleration in new case growth in October.

View enlarged chart.

Curiously, however, the stock market appears to be discounting the chances of new lockdowns—or at least the nature of them. As the S&P 500 Index sits near all-time highs, cyclical stocks are outperforming defensives, small caps have outperformed large caps, Treasury yields have been rising, and there’s been a rotation out of the “stay at home” stocks—certainly a very different market environment than we saw leading up to the March volatility. Recent progress on the path forward for a vaccine is a material development for a forward-looking mechanism like the stock market, and this may be what is altering the market’s perception of the risk of additional restrictions.

While a double-dip recession is not our base case and we are encouraged by the market’s resilience, the worrisome trend in COVID-19 data may have raised the chances of tripping up the recovery. We’ll continue to monitor real-time data indicators for insight on the path forward for the virus and the economy.

 

 

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