Economic Blog Posted by lplresearch
COVID-19 cases have been rising in several regions around the world, prompting many countries to implement new restrictions to curb the spread of the virus. Governments in a few European countries have rolled out what has been dubbed “lockdown 2.0,” and high-frequency data in the region, highlighted in our blog Europe’s Lockdown 2.0 May Be Smarter, has shown a reduction in economic activity. While new restrictions are more targeted than those used in the spring, economies currently are in a more fragile position and some could even be at risk of a “double-dip” recession.
As shown in the LPL Chart of the Day, COVID-19 data in the United States has gotten worse in the fourth quarter. With conditions deteriorating and the weather getting colder, there is a growing risk that more restrictions will be enacted in the United States as well. California and New York have already implemented some initial rollbacks such as nighttime curfews and school closings, while additional measures are being considered elsewhere.
The US economy appears to be in a better position to withstand these curbs than it was in the spring, but unemployment remains high at 6.9%, and economic data for service-oriented industries has shown fading momentum in recent months. If the uptick in jobless claims last week is the beginning of a trend, consumer spending may decline, which could affect roughly 70% of the US economy.
“The worsening trends in COVID-19 data present a very real risk to an economy that remains on soft ground,” noted LPL Chief Market Strategist Ryan Detrick. “While recent news on vaccine progress has been a welcome development, the actual rollout of a vaccine could take longer than people realize.”
Even without new lockdowns, it appears that consumer behavior has already begun to react to the rise in cases, presenting a risk to economic activity regardless of any policy decisions to curb activity. Real-time data series like restaurant bookings through OpenTable have been declining in recent weeks, particularly since the acceleration in new case growth in October.
Curiously, however, the stock market appears to be discounting the chances of new lockdowns—or at least the nature of them. As the S&P 500 Index sits near all-time highs, cyclical stocks are outperforming defensives, small caps have outperformed large caps, Treasury yields have been rising, and there’s been a rotation out of the “stay at home” stocks—certainly a very different market environment than we saw leading up to the March volatility. Recent progress on the path forward for a vaccine is a material development for a forward-looking mechanism like the stock market, and this may be what is altering the market’s perception of the risk of additional restrictions.
While a double-dip recession is not our base case and we are encouraged by the market’s resilience, the worrisome trend in COVID-19 data may have raised the chances of tripping up the recovery. We’ll continue to monitor real-time data indicators for insight on the path forward for the virus and the economy.
IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
All index and market data from FactSet and Bloomberg.
This Research material was prepared by LPL Financial, LLC.
Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
- Not Insured by FDIC/NCUA or Any Other Government Agency
- Not Bank/Credit Union Guaranteed
- Not Bank/Credit Union Deposits or Obligations
- May Lose Value