From Pandemic to Protests
Author: Kevin McCreadie
June 8, 2020
It takes a lot to turn the news cycle in a global pandemic. But powerful protests against police brutality and racial injustice, as well as a deteriorating U.S.-China relationship, have wrested headlines away from COVID-19 and carry important social, political and market implications. AGF’s CEO and Chief Investment Officer explores what these issues mean for investors.
Understandably, the COVID-19 pandemic has been the primary focus of investors for most of this year. How much longer can it hold this much sway on investors?
It will likely remain top of mind until there’s a vaccine or an approved drug therapy that can minimize the risk of the virus, so it’s going to be very much a part of the investment landscape for some time. However, that said, the news cycle is starting to turn again and over the past couple of weeks, it’s been other events and story lines that have been capturing headlines, including, of course, the ongoing protests against racism and social injustice that are taking place across the United States and elsewhere around the world. And rightfully so. This is truly history in the making and it demands our full attention, otherwise we won’t learn from the experience what’s necessary to move society forward in a progressive way.
Are you surprised at the market reaction to the protests?
Yes and no. Equity markets have continued to rally since George Floyd’s killing in large part because there haven’t been any major setbacks in the re-opening of the U.S. economy and no clear signs to date that it is causing a serious uptick in new cases of the virus. On top of that, employment figures for May were shockingly positive giving even more support for the to rebound off the March bottom. But I do believe the market is weighing the protests carefully. One concern, for sure, is whether the mass protests are putting more people in danger of contracting the virus and igniting a second wave of the pandemic, but that doesn’t seem to be weighing on investors all that much. If, in a few weeks, there is no surge in cases, this will likely be a positive for markets. There are also the longer-term implications of the protests that are being clearly considered but may be difficult to quantify right now. For instance, what impact will this have on the U.S. election and President Trump’s re-election chances? He has been criticized on all sides for the way he has handled the protests and the presidential race is one of the storylines that will continue to become more important to investors in the coming weeks.
The deteriorating relationship between the U.S. and China has also re-emerged as an important storyline. What impact does it have on markets?
It’s already acting as a bit of drag. Some of the down days that the market has experienced in recent weeks can be directly attributed to these fresh new tensions. Obviously, relations between the two countries are strained and have been for years, but the pandemic is exacerbating the situation and the fact that it’s an election year in the U.S. doesn’t help. Trump wants to be seen as tough on China in order to appeal to his base and seems dead set on stepping up the fight and unravelling the progress that was made when phase one of the U.S.-China trade deal was signed at the beginning of this year. At the same time, he may not want to risk upending the economy and/or markets by stoking another full-blown trade war. Of course, China’s government plays a role in this as well. Their aggressive stance in the face of ongoing criticism from several countries around the world isn’t winning them any allies in their rift with the U.S. and may end up fanning the flames further.
And what about the market rally. Has that become a story on its own that demands some attention?
The market obviously takes its cues from these other events unfolding, but there are times when it becomes the story all on its own. Think back to how much ink was spilled on the bull market of the past decade and whether stocks could keep climbing higher. A lot of that was based on valuations and technical analysis that was somewhat removed from the macro environment. So, yes, the rally off the March bottom is certainly something investors need to focus on, but not in isolation of what’s going on around it. It’s an encouraging sign, for instance, to see more breadth in the market than was the case earlier on in the rebound when just a handful of growth stocks were responsible for almost all the gains, but that breadth, while positive for stock markets going forward, may not mean much if there’s a rash of new COVID-19 cases or further flare-up in tensions between the U.S. and China. And while unemployment reports in the U.S. and Canada were better than expected, these are still terrible numbers that will become important in the near term to gauge how successful efforts have been to the re-start of the global economy.
Kevin McCreadie is Chief Executive Officer and Chief Investment Officer at AGF Management Ltd. He is a regular contributor to AGF Perspectives.
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