Will COVID-19’s second wave crash share markets a second time?

With trillions of dollars of stimulus measures stalled in the US and the virus spreading rapidly, what can ASX share market investors expect?

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downward arrow illustrating global share market crash

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In the ongoing share market battle between the coronavirus and the next rounds of government stimulus, the virus took the upper hand yesterday. Major indexes the world over closed well into the red. And it’s pushing down share prices on the S&P/ASX 200 Index (ASX: XJO) again today.

On the virus side, case numbers are exploding across much of Europe and the United States. In efforts to minimise the tragic loss of lives, European nations are reimposing strict lockdowns sure to drag on their economies. And many US hospitals are already at or near capacity.

Of course, it’s not just the US and Europe.

Australia looks like it may join New Zealand and a handful of other less populated nations in containing or even eliminating the pandemic. But COVID-19 continues to expand across most of the rest of the world. Brazil, Mexico, India and Iran, to name a few, are all at or near record levels of new infections.

And yesterday news broke that the world’s most populous nation, China, reported its first new local infection since 14 October.

The reported case numbers were relatively small — 20 tested people showed symptoms while 161 were asymptomatic. But the prospect of a second wave in China was likely the culprit which drove the ASX 200 from early morning gains to close at a loss, while also driving the Aussie dollar lower.

Bring on the stimulus

With these alarming statistics in mind, investors are rightfully worried about the short to mid-term earnings outlooks for their shareholdings, and hence their share prices.

Let’s not forget that when the first wave of COVID crashed across the globe it sent the ASX 200 down 37% in less than 5 weeks, before hitting bottom on 23 March.

It was the same the world over.

The S&P 500 Index (INDEXSP: .INX) lost 34% during the panic selling. Germany’s DAX PERFORMANCE-INDEX (INDEXDB: DAX) tumbled 39%. Japan’s Nikkei 225 (INDEXNIKKEI: NI225) fell by 31%.

I could go on. But you get the idea. No major share market index in the world escaped the bloodbath.

And what was it that pulled share prices back up from those depths?

Record fiscal and monetary stimulus unleashed by the world’s leading central banks and wealthiest nations.

Only then did markets look past the immediate spectre of the economic fallout from lockdowns and social distancing to the longer-term outlook of what had been – and likely will be again – high quality, high performing shares.

At the moment all eyes are on the United States to do the next round of heavy lifting.

And for good reason.

The much-delayed new round of fiscal stimulus promises to be huge, regardless of how the final stages of negotiations work out. The White House now supports a US$1.9 trillion (AU$2.7 trillion) spending package. The Democrats are holding out for US$2.4 trillion.

Unfortunately, this half-a-trillion-dollar gap again saw House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin walk away (or hang up their phones) without reaching an agreement yesterday.

Here’s what the pros are saying

With so much riding on the stimulus versus virus battle, here are some soundbites from the market experts.

According to Keith Buchanan, portfolio manager for GLOBALT Investments in Atlanta (quoted by Bloomberg here and here):

Fiscal stimulus seems to not be coming as quickly as we thought and the virus is coming quicker than we imagined. Putting those two together is somewhat of a reality check for the markets…

The gains we made from an economic standpoint have been predicated on the feeling like we can start to deal with the virus and continue the economic recovery out of the bottom. It’s a scary moment from an economic standpoint to have all of those indicators that the virus is getting worse as stimulus seems to be slowing down very dramatically.

And David Donabedian, chief investment officer of CIBC Private Wealth Management says:

The overwhelming consensus in the market is that while the economic recovery to date is impressive, it still needs help. It’s not ready to stand on its own, and so some fiscal support is necessary and does not really seem to be forthcoming before year-end…

You really can’t blame the stock market for pulling back at any point given how far it’s come. It’s like a blast from the past – there’s rising concerns about COVID-19 and its impact on the economy.

Then there’s Ryan Detrick, chief market strategist for LPL Financial:

The double whammy of a stalled stimulus bill and new highs in cases is a harsh reminder of the many worries that are still out there. Most of the recent economic data has been strong, but when you see parts of Europe going back to rolling shutdowns, it reminds us this fight is still far from over.

But it’s not all doom and gloom for the short-term share market outlook.

A pre-election share market rally?

As a long-term investor, I believe you can look beyond most of this renewed angst. I’m confident that new stimulus measures will pass in the US and other developed nations. And, in time, the virus will be vanquished with effective vaccines and rapid testing.

On a much shorter time scale, next Tuesday, 3 November, marks the US presidential election. And if history is any guide, US – and likely Aussie – shares could rally into that date.

Miller Tabak strategist Matt Maley says the “odds are high” markets will rally through to 3 November.

As Bloomberg reports, in a note Maley wrote on Saturday, he pointed out the S&P 500 has rallied every time in the week before the presidential election since 1992, except 2016. The average gains in those 6 instances were 3.8%.

Maley noted:

Although the stock market fell 1.9% over the seven days of trading in 2016, you have to go all the way back to 1988 to find another time when it didn’t rally over the last week and a half of the election campaign.

Nothing is ever guaranteed in the markets… but our point is that history does tell us that the odds are high that the market will rally between now and Election Day.

With the average share price of the top 200 ASX companies down 1.3% at time of writing, we hope to see the pre-election market rally trend play out again this year.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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