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This week: Coronavirus – Europe and USA; Supreme Court options; Markets in the fall; Reading List.
Coronavirus – Europe and USA
Nearly all European countries are experiencing another wave of coronavirus cases. In Spain, daily cases have reached the March peak of 10,000+ and are now fading back. The UK and Austria are at or near their spring highs. In France, daily cases have far surpassed the spring levels and now stand near 13,000. The increases in Italy, Germany and Switzerland are more subdued than in the spring but are still ongoing. More reassuring, the number of daily deaths in all these countries remains very small (even accounting for a time lag), from single-digits in many places to a few dozens in Spain and France, compared to hundreds daily in the spring.
In the Nordic countries, Denmark, Finland and Norway have seen case increases but Sweden so far has not (see chart). It is too early to draw conclusions but it is possible that Sweden’s policy of avoiding lockdowns in the spring is now paying off, if the country has achieved a higher degree of immunity than its neighbors.
In the July 29th Wednesday Briefs, we speculated that a typical wave lasts five to seven weeks from onset to peak. If this is so, most of these countries should be peaking in the not so distant future.
Meanwhile the US is entering the fall season with the lowest positivity rate (those testing positive as percent of all tests) since June, a helpful starting point if we are destined for another wave when temperatures cool. New York State looks good so far with a positivity rate around 0.9% but the real test will come in late September and early October after public schools reopen on 29th September for partial on-site teaching. That date has been pushed twice and could be pushed again. Meanwhile, thousands of private school students have already been back in their school buildings for several weeks with no visible impact on infection rates so far, an encouraging but inconclusive sign.
Supreme Court Options
The passing of Supreme Court Justice Ruth Bader Ginzburg raises the temperature in the current electoral campaign. The President has already stated that his choice to succeed her “would probably be a woman”. Among possible nominees are Justices Amy Barrett and Barbara Lagoa. Here is a brief report on both from Reuters:
Barrett is a devout Catholic and mother of seven and was a law clerk for the late Antonin Scalia with whom she is seen as ideologically aligned. Lagoa hails from Florida where she served on the Supreme Court before becoming a Federal judge. In our view, the more likely nominee is Lagoa because she is from Florida, a crucial swing state, and would play better with late-deciding independents. Although Barrett has more appeal for the Republican base, naming her could backfire on Trump by galvanizing and drawing to the ballot larger numbers of Democratic voters.
Markets in the Fall
The market sell-off that we foresaw in the September 2nd Briefs is continuing. The S&P 500 is now barely positive in 2020, after being up 5% year to date (ytd) in February, then down 32% ytd (a 35% drawdown from peak) in March then up 11% ytd (a 63% surge from bottom) in early September. Meanwhile the Nasdaq is now still up 20% in 2020, after being up 11% ytd in February, then down 24% ytd (a 31% drawdown) in March then up 42% ytd (an 86% surge) in early September.
The tech giants that led the March to September rally have all retreated over 10% since their summer highs but they are still positive ytd.
It is unlikely that a full recovery will take place before the outcome of the presidential election is known. The race is close enough that a Biden victory is a very real possibility, an event that would lead to a market sell-off at least in the near-term. The longer-term path will be easier to project after all results are known, the most market-negative combination being a Biden win and a Democrat-majority senate.
The increase in mail-in ballots, in part driven by the pandemic, adds another complication. With President Trump stating repeatedly his lack of confidence in the integrity of these votes, it is not difficult to paint a scenario of a contested outcome.
Another upcoming milestone will be the results of phase 3 trials for vaccines likely to be released before the election. Obviously, success would be supportive of the market, albeit to a limited extent because success is already largely assumed and priced in. On the other hand, disappointment would lead to more downside and a sense of disorientation among investors because our ability to get past the pandemic would be delayed by many months.
With all the uncertainty and possible erosion of trust, it is easy to see gold making new highs in the coming months. The near-term may be clouded by margin calls and “sell what you can” trading as we saw on some recent days but Ron Swanson may yet smile to the end of the year or beyond.
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