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Is the share market facing another February 2020 moment?

Is the share market facing another February 2020 moment? COVID-19 infection numbers continue to rise across the world, yet shares keep climbing.

Back in February 2020, COVID-19 was still in its early days of spreading across the world. Italy still only had a few hundred confirmed cases and the US only had a handful of cases. Outside of China, there were only a few thousand confirmed global cases.

But the trajectory of the infection then was clear – it was rising rapidly. That’s what caused the February 2020 market selloff to start.

But the infection trend has been good for quite a while in Europe, North America and Australia, infection numbers were falling. The improving situation was one of the main reasons why the share market has performed so well. The NASDAQ has actually reached a new all-time high, though the S&P/ASX 200 Index (ASX: XJO) hasn’t fully recovered yet.  

But now things are going the wrong way. There are cases of community transmission in Victoria. There are several states in the US like Texas and California which are seeing record new cases as well as record hospitalisations. Countries like Germany, Portugal, South Korea and others are seeing rising numbers again after restrictions were lifted.

What happens if things get worse again?

The OECD has warned that GDP will fall by 6.3% in Australia if there is a return of lockdowns. Thankfully only Victoria is thinking about lockdowns at the moment, most of the other states are free of COVID-19.

The OECD has also made a prediction that the OECD unemployment rate will reach 10% with little recovery of jobs in 2021 if there’s a second save of global infections. World GDP will drop 7.6% in 2020 if that happens. If there isn’t a second wave, unemployment will only reach 9.2% and GDP will drop 6% this year.

There are two clear potential scenarios. To me, it seems like investors are investing as though there aren’t going to be any other major COVID-19 disruptions this year. There are still huge outbreaks going on in places like Brazil and India. These two countries alone are meaningful contributors to the global economy.

Why I think the share market is acting like February 2020

For some reason it took the market a while to realise how much damage COVID-19 was going to do to the global economy and to confidence. Don’t get me wrong, areas of the world like Vietnam, New Zealand, Taiwan and most of Australia are now in a robust position. Borders are closed and citizens largely know how to act to avoid spreading the virus.

But I wouldn’t bet on the US implementing another widespread lockdown again despite the resurgent infection numbers. Who knows what will happen with the share market if COVID-19 is still prevalent around the time of the election?

What I think this means for shares

Just like in February 2020, I don’t think investors are fully taking into account how infectious or damaging COVID-19 is.

I think are some shares that have justifiably performed well over the past three months. Pushpay Holdings Ltd (ASX: PPH), A2 Milk Company Ltd (ASX: A2M), Bubs Australia Ltd (ASX: BUB), Fisher & Paykel Healthcare Corp Ltd (ASX: FPH), Ansell Limited (ASX: ANN) are some of the names I’d be happy to buy if the share market sold off again because I don’t believe their earnings would fall (much).

However, there are other businesses which I think would be at risk of a share price decline because investors may be too optimistic about the situation. And governments may not throw more money at citizens again. 

But don’t become too bearish. No-one knows what the share market will do next, so it’s best not to spend too much time trying to predict things. Investing is a long-term endeavour, it’s not just about what happens in 2020. I plan to keep investing every month into the best opportunities that I can see because of the long-term growth potential. Don’t forget that healthcare teams around the world are trying to find treatments and develop vaccines. A healthcare breakthrough could be very beneficial to people’s risk appetite. 

Some of the shares that could be a good idea to protect against another market fall are MFF Capital Investments Ltd (ASX: MFF) due to its large cash position and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) for its defensive investments.

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Motley Fool contributor Tristan Harrison owns shares of Magellan Flagship Fund Ltd and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of and has recommended BUBS AUST FPO, PUSHPAY FPO NZX, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of A2 Milk. The Motley Fool Australia has recommended Ansell Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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