We’ve all heard concerns expressed about a potential second wave of the coronavirus. There’s some confusion about what a second wave is. It’s not just a new outbreak of the same virus in a new location. That can be problematic, but it’s just a continuation of the first wave.
A true second wave involves some mutation in the virus that makes it more contagious, more fatal, or both. When it hits (often about six months after the first wave seems contained), it produces a worse pandemic, more panic, and more death than the first wave. Let’s hope that doesn’t happen with this coronavirus.
There’s no automatic reason why a second wave must happen (the mutation, if it happens, is somewhat random), but it has been a feature of three of the four worst pandemics of the past 105 years prior to the COVID-19 pandemic. So, it’s too soon to assume we’re out of the woods.
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A second wave of unemployment
At the same time, developed economies are experiencing a second wave now. But it’s not a second wave of the virus; it’s a second wave of unemployment. There was a first wave of layoffs and job losses in March, April, and May as the pandemic hit with full force.
Yet, those job losses were not as bad as they might have been due to government assistance in the form of cash handouts, job assistance, loans to small business employers, and direct bailouts to airlines, cruise ships, hotels, resorts, and other businesses most badly affected by the virus. Many individuals were able to keep their jobs because of those programs and others were hired back in July and August.
The problem now is that those benefit programs have mostly gone away, while the virus has not. Reopenings have turned into new lockdowns, but the government support is running out. Since businesses are still struggling, a new wave of layoffs has begun, as described in this article.
Running out of steam
It’s true that some jobs are being created and some workers rehired. But new layoffs are emerging, and the pace of job creation has tailed off significantly compared to gains in June and July. The economy is still recovering, but it seems to be running out of steam before we get anywhere near the pre-COVID output levels.
Far from a V-shaped recovery, we may be looking at an L-shaped recovery (a steep decline with a weak recovery), or even a W-shaped recovery (a second dip after a partial recovery from the first dip).
This could have important implications for major stock market indices, which have been levitating on a combination of central bank monetary ease, deficit spending, and a vaccine that would end the pandemic. But now the Fed is out of bullets, the Congress is balking at more trillion-dollar spending sprees, and the vaccine is still out of reach.
The perception of a quick recovery is colliding with the reality of a slow economy (at best) or a second recession (at worst). The second wave of layoffs is here. Let’s hope a second wave of virus infections is not right behind. If that happens, all bets are off.
The stock market says nothing about the real economy
There is one question I am asked most frequently these days: Why is the stock market doing so well if the economy is doing poorly?
There are many parts to the answer. The first is that the stock market is not a good reflection of the economy. The US economy produces 45% of its output and 50% of its jobs from small- and medium-sized business. Yet, the major stock market indices are dominated by technology, finance and telecommunications.
These sectors make up 30% of the cap weighting of the S&P 500, 40% of the names in the Dow Jones 30 industrials, and an even larger percentage of the NASDAQ Composite. Those sectors have been least affected by COVID because they are largely digital, do not rely on brick-and-mortar locations, and have workforces that can adapt to working from home with minimal disruption.
The second part of the answer is that the Fed has flooded the banking system with over $3 trillion of newly printed money. This props up the banks themselves and the big corporations (which are voracious borrowers), but does little for the bars, restaurants, salons, boutiques, farmers, and others that make up the backbone of the economy.
Finally, the evidence is that bad economic news is finally catching up to the stock market bubble. All three major market indices peaked on 2 September and have been struggling ever since (albeit with volatility and some up days). Meanwhile, the news from the real economy of jobs and pay cheques continues to get worse.
The losses will be permanent
As reported in this article, a new audit from the New York State Comptroller states that up to 50% of New York City bars and restaurants could close permanently in the next six months. This slice of the business community accounts for $27 billion per year in sales taxes and hundreds of thousands of jobs.
These projected losses are not the temporary result of ill-founded lockdowns; they will be lost permanently with no easy way back to the workforce for those most affected.
The bad news in the real economy continues. The bubble behaviour in the stock market also continues. When perception and reality diverge, reality always wins in the end, even if it takes time. A stock market correction is now waiting to happen.
All the best,
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Jim Rickards,
Strategist, The Daily Reckoning Australia
PS: Our publication The Daily Reckoning is a fantastic place to start your investment journey. We talk about the big trends driving our economy and the most innovative stocks on the ASX. Learn all about it here.
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