Is the Stock Market Focused on the Wrong News?
One of the points that I make frequently about the impact of news on financial markets is that it is not as simple as the content of the news itself. No news exists in a vacuum; there are nearly always multiple, simultaneous stories, and they can have conflicting implications for the market concerned. What matters when that happens is which of those stories traders and investors choose to focus on. In the stock market right now, only one thing matters -- the coronavirus pandemic. There may, however, be another story developing that will have a bigger long-term effect on stocks.
U.S. relations with China are deteriorating. The situation in Hong Kong and human rights abuses within the mainland have prompted a rare display of bipartisanship in Congress, with both sides condemning the Chinese. President Trump who, for his own political reasons really wants to blame China for the coronavirus and create an overseas enemy of some kind, has joined in, signing an executive order imposing sanctions related to Hong Kong.
From the market perspective, the biggest impact of all that is that it has ended talks about phase two of a trade deal between the two countries. It wasn’t that long ago that that kind of overnight news would have sent stocks tanking, but Dow futures, with the focus on the coronavirus vaccine news instead, were indicating an opening around 400 points higher than yesterday’s close as I wrote this piece.
The preoccupation with the pandemic is understandable. Covid-19 prompted a reaction that involved an unprecedented shutdown of the economy and recent events make a return to those dark days a possibility. A massive rise in unemployment and a big drop in GDP were bad enough when they hit a healthy economy, but if it were to happen again to an already weakened America in a fragile recovery it could have devastating consequences.
Because of that, the news from Moderna (MRNA) that their vaccine candidate produced antibodies in a limited trial is especially welcome. The prospect of an effective vaccine, even if it takes a few more months to develop and to produce at scale, reinforces the view that as bad as the current situation is, it is only temporary. The hope that that would be the case, alongside huge amounts of stimulus from both the Fed and Congress, is what has driven stocks to where they are.
What nobody seems to be considering though, is what a post-Covid economy might look like.
Even if it comes quickly, the recovery will be too late for a lot of companies; there have been around 120 Covid-related bankruptcies so far. And those that survive will, in many cases, reconsider staffing levels and work practices in way that will make unemployment a sticky problem. Retail will never be the same again, and the damage to sectors such as commercial real estate will take decades to repair, if it can be repaired at all.
The outlook certainly doesn’t seem to justify the high P/Es that we are currently seeing, and that is without the damaging effects to manufacturing and other sectors of another battle in the trade war.
The last few times that trade became an issue for the market, the Fed stepped in to initially reverse policy and then continue to cut interest rates, and the market bounced straight back. With rates at near zero and asset purchases in the billions though, there isn’t a lot of room to do that again. Nor can a Federal Government that is over $23 trillion in debt do much to help.
So, as the market cheers another positive vaccine story, I cannot help but wonder if they are overlooking the more important news. The U.S. economy survived the first round of the trade war because it was battling from a position of great strength. Starting round two with double digit unemployment and negative growth despite massive monetary and fiscal stimulus, however, means that the impact could be far greater this time around.
Cheer the vaccine news by all means, but don’t ignore the rumblings on China as you do so.