Could the resurgence in coronavirus cases stall an economic recovery?

On the latest edition of Market Week in Review, Quantitative Investment Strategist Dr. Kara Ng and Head of AIS Business Solutions Sophie Antal Gilbert discussed the surge in coronavirus cases, recent global economic data releases and highlights from Russell Investments' just-published Q3 Global Market Outlook.

Will rising infection rates interrupt nascent economic rebound?

The week of 22 June was a bumpy one for markets, Ng said, in part due to an uptick in coronavirus cases globally-particularly in Latin America, the Middle East, South Asia and parts of the U.S. "The stock market was rattled by fears that progress made toward containing the coronavirus is slipping," she noted, "which could lead to the further loss of human lives and a reduction in economic activity."

However, if one takes a glass-half-full viewpoint, the world's knowledge of therapeutic drugs to help treat the virus has improved since March, Ng said-meaning that the mortality rate from the coronavirus could be lower than earlier in the year. And, while a few U.S. states have delayed reopenings, she said that another widespread round of lockdowns appears less likely, unless infection and hospitalization rates spike significantly.

Looking at the situation from the glass-half-empty side, however, it's not hard to envision the potential for a widespread contraction in economic activity, Ng said. "Higher infection rates affect human behavior, because more individuals exercise caution," she said. "This causes a reduction in consumption and an increase in unemployment, which leads to a slowdown in overall economic activity," Ng explained.

As evidence, she cited the economic impact of the coronavirus on two similar countries, Sweden and Denmark. As the virus engulfed Europe in mid-March, Denmark imposed strict lockdowns, but Sweden did not. While Sweden unsurprisingly recorded a higher rate of coronavirus infections and deaths than Denmark, both nations saw a reduction in economic activity-even though Sweden's economy remained largely open, Ng noted.

The key takeaway from all of this? Ng is marginally more optimistic than a few months ago that the virus' impact on the economy this time around may not be as bad, mainly due to improvements in treating the virus and better preparedness overall. But the path that the virus takes remains a significant risk, she said, due to the likelihood of an economic slowdown in places where infections rise.

Global PMI surveys improve, while U.S. consumer spending rebounds

Turing to the latest economic data, Ng said that overall, economic activity across the globe has sharply rebounded following the widespread easing of lockdowns. While manufacturing and services sector PMIs (purchasing managers' indices) for the U.S., Europe and UK remain in contraction territory, they've all rebounded sharply in June, she said, reaching four-month highs. On another positive note, U.S. consumer spending rose by a record 8.2% in May, Ng noted.

The latest unemployment numbers offer a more mixed picture, she remarked. "While U.S. weekly initial and continued jobless claims continue to fall, both are doing so at a slower pace than expected," Ng explained. This has led to some concern that the U.S. labor market's recovery may be slowing, she noted, adding that the upcoming June employment report will serve as a key indicator.

Key takeaways from Q3 Global Market Outlook

Ng and the team of Russell Investments strategists released their Q3 Global Market Outlook on 24 June. One of the report's key takeaways is that the combination of an early business cycle, globally coordinated monetary stimulus, record-breaking levels of fiscal stimulus and muted inflation pressures should lead to a supportive environment for risky assets in the medium-term.

Another highlight of the outlook is that the team's composite contrarian indicator, which tracks the degree of investor pessimism or optimism, shifted from overly pessimistic to neutral in early June, Ng said. "In mid-March, this indicator showed extreme levels of market panic-which historically equates to a very attractive buying opportunity for risky assets. Now that sentiment is neutral, we expect that market reactions to both positive and negative news will be more balanced," she explained.

The team believes equities will outperform bonds over the medium-term, but sees tactical risks as more balanced in the near-term. "Ultimately, we believe in the value of sticking with a strategic, diversified multi-asset portfolio during today's times," Ng concluded.

 

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