The path of the virus is still the most important factor for markets. How worried should markets be about a “second wave”?

Our Top Market Takeaways for June 12, 2020.

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Markets in a minute

We’re not out of the woods yet


Following news that a second wave of the virus could be emerging in the U.S., the S&P 500 tumbled the most in 12 weeks on Thursday. And while it wasn’t the worst single day this year, it would have been in 2012, 2013, 2014, 2015, 2016, 2017, 2018 and 2019. These moves bring the index’s year-to-date price performance to -7.1%, despite getting back to flat for the year earlier in the week. Only 14 companies in the index are currently up this week.

Cyclical stocks and lockdown “losers” once again became subject to selling—energy, financials, industrials and materials all saw losses to the tune of -10%. At the same time, big tech-enabled names were left only slightly scathed by comparison. The tech-laden NASDAQ Composite Index even made new all-time highs earlier in the week. Safe havens likewise fared well, as U.S. 10-year Treasury yields have fallen roughly -20bps this week to ~0.70% and Gold has popped +3%.

It’s important to keep this week’s market moves in context: the losses this week followed a blockbuster rally the week prior, after which a number of names were starting to look “overbought.” This “overboughtness” tends to get resolved by time, or by a correction in the price (as we saw this week). But even with this latest decline, the S&P 500 is still up +34% from its lows. 

So, does the rally still have legs? We think so, but we’d stress that—especially during times of high volatility like this—it’s important to think about a “market of stocks” rather than “the stock market.” We continue to believe that there will be winners and losers to this crisis—megatrends like digital transformation, healthcare innovation and sustainability stand to generate growth for the coming years. At the same time, we’d stress that while a full recovery will undoubtedly take time, markets care more about rates of change rather than absolute levels. For example, while TSA checkpoint passenger volumes are still only 15% of what they were at this point last year, they are over 4.4x higher than they were at the depths of the lockdown in April. As the data inflects, and the recovery finds its footing, some exposure to cyclical areas of the market look prudent to us at this time.

What we did learn this week is that the path of the virus is still the most important factor for markets. So how worried should we be about a “second wave”?


Taking stock of the virus


The developed world appears to be past the peak of the virus (at least for the first wave), and the epicenter has moved to Latin America. However, there is newfound concern that relaxed social distancing policies are causing a resurgence. Indeed, several press reports suggested that we are already seeing a second wave, and the S&P 500 promptly fell -6% on Thursday. So how worried should we be?

First, we should say that human health is the most important thing. If COVID-19 is a problem somewhere, it is a problem everywhere due to the highly communicable nature of the virus. For markets and the economy, we should remember that the response to the virus is what matters. If policymakers shutter economic activity and re-impose stay at home orders, that would be a clear negative for the recovery. Also, if consumers continue to stay in their homes due to health concerns, it would stifle demand. So far, consumers everywhere seem to be stirring back to life, so a re-imposition of a “lockdown” would be the clearest negative. We believe that this would only happen if healthcare capacity is at risk. Given that, let’s take a closer look at the current hotspots.

As of Wednesday, based on data from Bloomberg and Johns Hopkins University, 13 states have a current 7-day average new infection count that is within 15% of the peak 7-day average of new infections. In English, 13 states are seeing new COVID-19 infections that are close to or at their highs since the outbreak started earlier this year. The first chart shows the 7-day average of the daily new case count for that group of 13 hot spots, alongside a composite of eastern seaboard states that saw severe outbreaks in March and April. Clearly, the trajectory of the 13 “hot spots” is concerning, but the increase is neither as steep nor as widespread as the outbreak that the eastern seaboard saw, at least so far. 

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Line chart displays the 7-day average of new confirmed COVID-19 cases from March 9, 2020, through June 9, 2020. It highlights 13 hot spot states alongside some eastern seaboard states that had severe outbreaks.

Policymakers [seem] willing to tolerate stable to slightly rising new infection curves in exchange for re-opening the economy as long as the healthcare system has excess capacity.

The next chart helps us contextualize the current state of affairs. It shows the percentage of positive tests (a key benchmark for public health officials) and ICU capacity utilization. For percentage of tests positive, the lower the better: a low number suggests that most of the cases are being captured. If the ratio is higher, it could mean that only individuals with severe symptoms are being tested, which means that more minor and asymptomatic people could spread the virus further. The World Health Organization has suggested that a 5% positive benchmark suggests that a jurisdiction is likely doing enough.

Out of the 13, six of those states (CA, KY, FL, NM, NV, OR) are below or close to that benchmark. The remaining seven (AZ, UT, AR, NC, SC, TX, MS) are more concerning. Now the other metric comes into play: ICU capacity. Based on data from the Maryland Transportation Institute at the University of Maryland, only one of those seven (Arizona) has a current ICU capacity utilization for COVID-19 patients above 15%. For comparison, at its peak, New York ICU utilization just from COVID-19 patients was well over 100%. Arizona’s situation is certainly concerning, but right now we think there is a very high bar to re-imposing state-wide lockdowns. 

This chart shows percent of individuals testing positive as a percent of total tests in the 13 hot spot states against a 5% benchmark. Out of the 13, six of those states (CA, KY, FL, NM, NV, OR) are below or close to that benchmark. Whereas, the remaining seven (AZ, UT, AR, NC, SC, TX, MS) are above the benchmark.

Bottom line: For the country as a whole, we seem to be past the peak, but the surge in places like Texas, Arizona, and Utah is concerning. What seems to be happening is that policymakers are willing to tolerate stable to slightly rising new infection curves in exchange for re-opening the economy as long as the healthcare system has excess capacity. They seem to be sticking with it,1 even though there is more concern in places such as parts of Arizona and Houston, Texas.

However, this week is a reminder that the biggest risk factor for markets is still the virus, and investors will be quick to seek safety if the situation deteriorates. We will be watching it closely.    

1Based on my Instagram, our colleagues in Los Angeles can even go to Happy Hour at West 4th and Jane in Santa Monica after work.


All market and economic data as of June 2020 and sourced from Bloomberg and FactSet unless otherwise stated.

Sources:  Maryland Transportation Institute (2020). University of Maryland COVID-19 Impact Analysis Platform,, accessed on 6/11/2020, University of Maryland, College Park, USA.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.


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