Last week, I laid out five things to watch in the month of August. Over the past seven days, we’ve seen new developments in each one. This week, I offer a quick update to each of those five issues, and then highlight positive news for U.S. jobless claims and vaccine development.
1) Progress toward more U.S. fiscal stimulus. As expected, the odds of a timely Phase 4 deal worsened last week, as Congress left for recess until September. The good news is that federal unemployment benefits have been extended by President Donald Trump’s executive order last week. The bad news is that other areas that need funding did not receive any relief from the president. In particular, I am concerned about state and local governments, which are currently responsible for 13% of jobs in the U.S.,1 and small businesses, which as late as 2016 were responsible for 47% of private sector jobs.2 I continue to believe that, because it is an election year, ultimately a deal will be struck. But the sooner, the better — the longer it takes, the more lasting the damage may be.
2) COVID-19 infections. The U.S. appears to be bending the curve again — while the data in some states is more problematic than in others, the nationwide 7-day average of new cases has been falling since early August. However, as I have said before, I worry that school openings will cause a surge in infections. Beyond the U.S., I’m concerned about the spikes in Europe, especially Spain and France. We are also seeing a major resurgence in Japan (although as a percentage of the population, it still remains low). And then there is Brazil and India — neither country has been able to get the virus under control either.
3) U.S.-China tensions. This situation became more acrimonious last week. With no explanation, last Friday the U.S. and China called off talks that were scheduled for this weekend to review both sides’ adherence to the Phase 1 trade agreement that was signed in January. Most had expected the talks to occur despite the heightening of tensions between the two countries. This pushed U.S. stocks lower. I expect the U.S.-Sino relationship to worsen from here, but that could make Chinese equities more attractive for investors with longer time horizons.
4) The U.S. dollar. The dollar continued to weaken modestly last week. A variety of factors were at play, including extreme Federal Reserve accommodation and expectations about more deficit spending. I believe this continues to bode well for emerging markets equities.
5) Joe Biden’s vice-presidential pick. Democratic presidential candidate Joe Biden selected Senator Kamala Harris as his running mate — a pick that was both historic and widely expected. As I said last week, the VP pick generally doesn’t matter unless it generates controversy. In my view, the Biden campaign avoided an unforced error with this selection. Senator Harris is arguably the most moderate pick of the field of finalists reportedly considered, which I believe was a clear relief to markets. Investors can now move on to worrying about other things.
Waiting for a vaccine
Last week also saw positive economic data in parts of the world. Eurozone industrial production was positive, as were industrial production and auto sales in China. I was also impressed to see U.S. initial jobless claims clock in below 1 million for the first time since pandemic-related layoffs moved into high gear.3 The economic data and, more importantly, hopes for the rapid development of an effective vaccine helped move some U.S. and Asian stock indexes higher (specifically the Dow Jones Industrial Average, the Shanghai Composite Index and the Nikkei 225 Index), although European stocks (the FTSE 100 Index and the DAX) lost ground last week. It also helped push up yields for longer-dated U.S. Treasuries, indicating an improvement in investors’ optimism for the future.
As the world anxiously watches for a COVID-19 vaccine, I’m reminded of the play “Waiting for Godot.” As the title indicates, the play revolves around two men who are waiting for a character named Godot. They wait for what seems like an eternity, wondering aloud if the elusive Godot will ever arrive and what will happen if he does. I have come to the conclusion that the market is waiting for its own Godot — investors are assuming that a vaccine will come soon, and in the meantime expect monetary policy accommodation to remain massive and economic data to continue improving. That would be a “best case” scenario – but rarely do we get the ideal scenario we are looking for. In the play (spoiler alert), Godot never arrives, and the two men become despondent.
If an effective vaccine takes longer to arrive than investors expect, and economic data deteriorates, I don’t expect markets to become despondent — but I do think we need to be prepared for some level of disappointment (especially in the U.S. given stretched equity valuations).
And that could be a very real possibility. Last week, Germany’s Robert Koch Institute, a leading infectious disease institute, corrected an earlier statement saying that a vaccine could be ready by the autumn of 2020.4 The institute qualified its earlier comments by stating that such a vaccine would be unlikely to fully control the pandemic; this is not surprising given that there could easily be viral mutations or only brief periods of immunity provided by the vaccine.
But perhaps more effective testing and contact tracing in countries like the U.S. could soften that disappointment. Bill Gates, among others, has been very critical of testing in the U.S., pointing out that it can take days to receive the results of COVID-19 tests. However, it was announced this past weekend that the Food and Drug Administration approved an effective saliva test that can provide results in just a few hours at a much lower cost.5 This could be extremely helpful in making tests far more widespread and less costly — and, as a result, increasing consumer confidence.
At the very end of “Waiting for Godot,” the two men don’t leave. They remain in place as the curtain falls. We don’t know if they gave up, or if they’re still waiting. Of course, unlike a play, there is no “last page to the script” in our wait — we know that the work toward a vaccine and effective therapies and management will continue, even if it doesn’t follow the expected timeline.