The Impact of a Second Coronavirus Wave

THE BRIEF: A Rising Corona-Tide Destroys All Boats

Investors woke up last week to a harsh reminder that stocks do not only go up… shocking. Signs of a second wave of COVID and potential lockdown extensions sent the stock market down with the largest single day loss since March.

• On June 10, the Organisation for Economic Co-operation and Development released a report that predicted the US economy shrinking by 7.3% if a second wave was avoided and 8.3% if not. In a $21 trillion economy that employs over 150 million people, a 1% difference could lead to millions of lost jobs and over $200 billion of lost value.

THE EXPLANATION

Although seen as reckless, state governors have rushed to reopen their economies in an attempt to balance the livelihood and health of their citizens. Signs of a second wave have emerged in Arizona, Texas, Florida, and California.

Impacts of a potential second wave:

• Less funding and support… Business re-openings could be halted and this time around, businesses and those unemployed may receive less aid from a government that has already pumped more than $3.3 trillion into the economy. Governments must balance their federal budget and an increase in stimulus funding could lead to higher inflation.
• Market instability… Recent market volatility would only be a teaser to the bumpy ride ahead for the financial markets. Further shutdowns could damage an already fragile economy, sending stock prices tumbling. Last week’s selloff serves as a reminder that the stock market is not immune to bad news.

THE ACTION

The industries that benefited the most at the beginning of the pandemic will be the ones that stand to gain midst further outbreaks. These include your work from home winners and defensive stocks (consumer staples, pharmaceuticals, utilities, etc.).

What does this mean for your current investments?

Those investing for the long-term should not worry about short term price movements in the market. Taking a look back at the March crash, stock prices nearly recovered all their value after falling over 35% within 4 months. Those that sold would have taken a big loss on their investment while those that held would have recovered the majority of their losses. The same principles hold true if we were to experience a second wave.