Markets Sink On Second Wave Fears

Investors were reminded of the dark days of Q1 in Wednesday’s session as equities were dumped en masse in the face of a second COVID-19 wave. For many, this weakness in equities won’t come as too much of a surprise as it’s been bubbling for a few weeks. States such as Florida, Arizona, Utah, and Texas have all been setting consistent new records for the number of daily reported coronavirus cases and fears are growing of a nationwide surge just as economies are reopening and restrictions are being relaxed.

The Dow Jones Industrial Average index finished down 700 points for its worst day in two weeks while the tech-heavy Nasdaq index finished the session with its first down day out of nine. Just like in the run-up to the first wave back in February and March, some stocks, notably travel names, have been acting as the canary in a coal mine and getting sold hard even as the broader market bobbed along.

Canaries

Notwithstanding the terrific bounce of the lows of March, companies like Royal Caribbean Cruises (NYSE: RCL), American Airlines (NASDAQ: AAL) and Wynn Resorts (NASDAQ: WYNN) have been seeing heavy selling all week and based on Wednesday’s session, it looks like the rest of the market is catching on. Concerns have been mounting as many states appear incapable of putting a halt to new cases even as countries around the world begin to log zero death days.

Shares of Royal Caribbean are now down 35% over the past three weeks, American Airlines are down 43% from June’s high while Wynn is down just over 30% since the start of the month. For context, as recently as yesterday the S&P 500 index was within 2% of its June, and post-crash, highs.

It highlights a question that’s sure to be on the minds of everyone on Wall Street and in government. If the initial wave of restrictions hasn’t kept the virus at bay, how draconian does the second wave of them have to be in order to be effective? And what will the economic cost of that be? Some states which imposed strict restrictions, for example, California, have barely reopened their economies but are currently seeing daily jumps of 7,000 new cases. Whatever about trying to limit social contact and enforcing social distancing during the spring, it will be twice as hard for authorities to do this during the summer months.

Turbulence to Stay

In the middle of both rising stocks and rising coronavirus cases, last week saw the 11th straight week of more than 1 million new claims for unemployment benefits which is kind of scary. Even as some industries like technology have seen strong bids from investors to send their stocks to all-time highs, there are still companies going out of business, factories shutting down and people being laid off.

The Federal Reserve has made it clear that they’re prepared to do whatever it takes to support equities and to make sure there’s a decent degree of confidence in the market, but for investors thinking about getting involved at these levels, the risk is certainly higher than it was a month ago.

It remains to be seen if or when a coronavirus vaccine can hit the market and that would put paid to a lot of these concerns. But until that happens, investors are going to be playing a game of cat and mouse with the virus. If recent months are anything to go by, investors will be spooked by a spike in cases, markets will fall, confidence will return, markets will rally, and so on.

Buckle your seat belts, it’s going to be a bumpy summer.