The Restart, the Vaccine and China: Market Catalysts to Keep an Eye On

May 29, 2020

5 minute read

It’s been one hundred days since equity markets hit all-time highs and then nosedived into bear market territory earlier this spring. AGF’s CEO and Chief Investment Officer gives his latest thoughts on the rollercoaster ride that has transpired in the ensuing weeks and what it might take to keep the recent rally rolling.

Stocks continue to grind higher as economies re-open around the world. Is the rally sustainable?

What has transpired in markets since late February is truly remarkable. The initial selloff was unlike anything I’ve experienced before in terms of the speed and magnitude of the correction and the rally from the bottom has been equally unique. The S&P 500 is up more than 30% since late March and has rebounded without much resistance short of a few negative days here and there. But the next leg for markets on their way back to previous highs set earlier this year probably won’t be as seamless. A lot, of course, will depend on the restart of the global economy and whether it can continue to go off without a major setback. If you think about it, the real black swan event may not have been the pandemic, but the economic lockdown that resulted from it. I’m not sure anybody saw that coming, so getting the economy going again is going to be paramount to markets rallying further. Even then, it’s probably unreasonable to think it will be clear sailing from here. At some point, fatigue sets in during a crisis of this extent and it shouldn’t come as a surprise if markets go sideways for a while as investors await evidence that the restart is taking hold and process news around a vaccine or therapy for the virus.

What are the chances of another significant pullback?

A retest of the March lows may be a diminishing concern, but it’s still a possibility that stocks fall 10% or more from current levels if something negative about the economy materializes. At this stage in the crisis, negative “left tail” events that lead to losses are likely to have more of an impact on the markets than positive “right tail” events that help push markets higher. That’s what tends to happen after markets rally so sharply in a short period of time. Good news doesn’t move the needle as much as bad news. In other words, if new cases of the virus continue to fall and more people return to work and the economy picks up faster than expected, market gains would likely be tempered and more moderate than the rebound to date off the March bottom. But if the restart begins to falter and/or there is a second wave of the pandemic, watch out. The losses could pile up quickly, bringing the re-test of the March lows into play.

What influence does the race to develop a vaccine have on markets?

Whether the economic restart is successful depends on several factors including our continued diligence in maintaining social distancing and, when necessary, quarantine protocols as countries around the world continue to re-open. But the market is going to become increasingly fixated on the prospects of a successful vaccine or drug therapy getting approval over the next few months. A vaccine would obviously be a powerful catalyst, as it could end this crisis once and for all, and already we’re seeing markets react to news related to some of the clinical trials in progress. But the chances of a vaccine being approved and available before year-end remains low. Although efforts like Operation Warp Speed in the U.S. are commendable for wanting to fast-track the process, it normally takes several years to get a vaccine to market and, in this case, most experts believe it will be next year at the very earliest before one is ready for mass consumption. That said, the approval of a treatment that can help people alleviate the symptoms of the virus, but not cure it, may be closer at hand. And while this wouldn’t give the market the same kind of boost as an outright vaccine, the assurance that some of the severe complications of the virus can be managed would be a definite catalyst.

Are there other opportunities and/or risks that investors need to keep an eye on as well?

It’s interesting. When a crisis like this hits, it can feel like you are in a bubble and all that matters is the problem at hand. All other opportunities and risks associated with the market just seem to disappear. But as things start to normalize, these other opportunities and risks begin to surface and reassert themselves as determining factors in the next direction taken by markets. It feels like we’re at that point now where the pandemic isn’t the only event with the potential to move markets. Take the flare up in tensions between the U.S. and China. Yes, it’s related to the pandemic, but it’s based on deep-seated antagonism between the two countries that has been brewing for years and threatens again to become a differentiated risk of its own. This is especially true if it leads to another round of protracted trade negotiations. In fact, over the past couple of weeks, there have already been a few trading sessions impacted by the deteriorating U.S.-China relationship. There’s also the U.S. election to think about. Again, it has taken a back seat to the pandemic, but as we get closer to election date, it’s bound to become more of a focal point with investors.

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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