Investors seem buoyed by policy support and the digital economy. COVID-19 may also have lost its shock value.

The United States is nowhere close to containing COVID-19. Yet markets seem relatively unfazed by the resurgence of new cases. In fact, since June, the tech-heavy NASDAQ 100 Index notched 12 of its own new all-time highs even as new COVID-19 cases in the United States reached 10 new daily highs.

What’s going on?

Our view:

  • Asset prices have been generally supported by the full power of the U.S. Federal Reserve, a surprisingly quick bounce in economic activity from the bottom, and by the hope that the medical community’s unprecedented global race toward a vaccine or treatment will succeed.
  • The virus crisis is accelerating the United States’ move to a digital economy and solidifying the leadership of tech stocks.
  • We expect the recovery to continue, and we do not expect a double-dip recession (“W” shaped) path forward. While consumption may slow as the virus spreads in areas that had been showing a strong economic rebound, containment measures are now likely to be more precise (e.g., closing bars and mandating masks) than blunt (shelter in place).
  • Still, it’s likely that market volatility will continue and that a full economic recovery will be difficult until there is a medical solution to COVID-19.

In our mid-year outlook, we said a second wave of COVID-19 infections could pose a serious risk to the economic recovery and the markets.

Then, after declining for the better part of two-and-a-half months, new confirmed COVID-19 infections in the United States started soaring in the second half of June. By early July, the United States was reporting more than 50,000 new cases per day, which is about 20,000 more than in early April when we thought the crisis was at its zenith.

But rather than see this as a second wave, the best way to think about COVID-19 in the United States now is that the first wave is cresting for a third time:

  1. First, COVID-19 landed on the West Coast (Seattle) and the East Coast’s tri-state area (New York, New Jersey and Connecticut).
  2. The virus then attacked the Midwest and Mid-Atlantic states.
  3. Now, it is surging through the South and West’s Sun Belt (especially Arizona, California, Florida and Texas). 

Crucially, new COVID-19 deaths have continued to decline even as confirmed cases have risen. It remains to be seen whether an increase in deaths will follow, on a lagged basis. Even if the mortality rate is truly declining, COVID-19 remains a very serious threat to human health.     

COVID-19 in the U.S.: Third phase of the first wave

Dashed circled areas indicate the three phases of the first wave. TX and CA daily case growth slightly below 4%. Source: Bloomberg, Johns Hopkins, J.P. Morgan Technical Research. July 2020. 
Line chart showing COVID-19 cases in the United States from February 16 through July 5, 2020. The chart highlights that this first wave of COVID-19 cases has had three distinct “phases”—the first phase focused on the Northeast/Pacific Northwest, the second on the Midwest/Mid-Atlantic and the third (current phase) on the Sun Belt.

Rather than reimpose stay-at-home orders prevalent at the beginning of the year, policymakers have been opting to fine-tune their economic reopenings with such measures as closing bars, limiting occupancy in indoor restaurants and mandating face coverings in public.

Going forward, it seems unlikely that policymakers will try to control COVID-19 by reimposing the most economically disruptive restrictions, such as “shelter in place” on a broad scale. However, there is a chance that some cities or states may have no other choices if cases continue to rise.

Already we are seeing signs that economic activity is slowing in places where the virus threat is elevated. Spending via credit cards has leveled off in the states with more severe outbreaks. Likewise, hours worked is pausing in hard-hit states; mobility and economic engagement have flatlined.

It is hard to forecast how much the virus threat will hinder consumption, but it seems clear that a full economic recovery without containing the virus or developing a medical solution would be difficult.  

Mobility and economic engagement stalling in states with virus surge

Source: Federal Reserve Bank of Dallas, SafeGraph, Haver. July 3, 2020.
Line chart compares the Mobility and Engagement Index average for states FL, TX, SC, AZ to that of states CT, NY, NJ, PA from January 15 to July 3, 2020. The lines move in tandem, starting at close to zero at the beginning of the year, decreasing dramatically from March to April (due to COVID-19 in the United States). Since then, the first line (showing FL, TX, SC, AZ) has increased, but seems to have stalled from June onward, while the second line (CT, NY, NJ, PA) has increased and continues to do so.

Markets are working off of the playbook that technology and digitally enabled companies are relative “winners,” policymakers will do all they can to support incomes and availability of credit, and the likelihood of a medical solution to the COVID-19 crisis is rising. In other words, markets are going to get over this crisis someday, so they might as well get over it now.1

When the virus seemed largely contained in early June, cyclical stocks that are more exposed to the tangible economy (e.g., physical interaction, travel, lending to small and medium-sized businesses) began catching up to the tech and digitally exposed companies that are more insulated from the virus’s economic threat. Now, those stocks have given back most of that catch-up. Bank underperformance relative to the broad market is about back to where it was during the depths of the Global Financial Crisis!

Meanwhile, tech stocks continue to hit new highs.  

The digital economy wins in the COVID-19 world; the “real” economy loses

Source: Bloomberg, NYSE, S&P, KBW. July 6, 2020. FANG+ Index includes TSLA, AMZN, NFLX, BABA, BIDU, AAPL, NVDA, GOOGL, FB and TWTR.
Line chart compares FANG+, S&P 500 and U.S. Bank Indexes from December 2019 through July 2020. The chart highlights that since March 2020, FANG+ (which include stocks TSLA, AMZN, NFLX, BABA, BIDU, AAPL, NVDA, GOOGL, FB and TWTR) has performed better than the other indexes.

In fixed income, investment grade and high yield spreads have widened modestly. However, the Federal Reserve’s efforts seem to have dampened the impact. Likewise, sovereign yields have been well behaved.

Scanning the world, Europe has not materially outperformed the United States during the recent surge in COVID-19 cases even though most European nations seem to be more successful at controlling the virus. This situation suggests that policy support and exposure to the digital economy are the most important characteristics for markets right now.

To be fair, we are a bit surprised that the virus’s surge across California, Arizona, Texas, Florida and many other states did not precipitate a more drastic sell-off in stocks. Indeed, investors’ only truly scary day during this recent surge was June 11, when the market dropped 6% in a single day.

Could it be that COVID-19 has lost some of its shock factor?

Cases are rising in the United States, but Europe and Asia have been able to contain the virus. It is possible to do, if there is individual and political willingness. 

Perhaps investors have hope that a solution is on the horizon. Most health experts seem to believe now that treatment and a vaccine are questions of “when” and not “if.” Either would present a clean resolution to the current problem. Those stocks most exposed to the tangible economy have the most to gain from a medical breakthrough. 

There is a greater sense of economic security. U.S. policy support seems to have been fairly successful at replacing both business and consumer incomes. Also, the companies that make up the largest share of investable indices are relatively sheltered from the tangible economic impacts and may even be gaining on their already formidable market share. In terms of traditional metrics, the unemployment rate has now fallen for two months in a row, and job gains have drastically exceeded expectations.

Serious investment risks remain. The most concerning to us would be if Congress fails to pass a fourth round of fiscal support that extends unemployment insurance and provides funds for state and local governments. To illustrate how important government support is, personal incomes actually grew during April and May. Clearly, in most recessions the opposite occurs.

Clearly too, there’s a bumpy ride ahead. While the United States and the rest of the world work toward an eventual resolution to this historic coronavirus pandemic, we are staying focused on our key investment themes:

  • Navigating volatility
  • Finding yield
  • Investing in the durable trends that will drive the recovery

Speak with your J.P. Morgan team about how these considerations may support your long-term goals. 

1One of the artists we found during quarantine was Logan Ledger. We credit him for that analogy.