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Why This Stock Market Sell-off Might Be Different




By the dip has been the mantra in global equity markets over the past few months, since the sharp sell-off in late February/early March as the Covid-19 virus went global. 


If you follow our blog, you will be aware of the major reasons why global stock markets have been able to rebound so strongly. They can be summarised in three key pillars of support;


1) Swift, coordinated, global monetary policy response


All of the world’s major central banks acted aggressively and decisively in response to the Covid-19 outbreak at lockdowns, with developed market central banks (led by the Fed) axing rates quickly to zero and pumping markets full of liquidity and QE. 


2) Swift, coordinated, global fiscal policy response


Many developed markets already have economic stabilisers, which act to inject money into the economy in times of recession (think unemployment benefits - when joblessness rises, more is spent automatically on benefits). Most major economies (USA, UK, EU etc.) acted quickly to drastically top up these economic stabilisers and most are now in the process of putting together long-term recovery packages (involving HUGE government spending to set the economy back in the right direction). 


3) Flattening of global Covid-19 curves


Lockdowns in outbreak hotspots in key markets (think EU, UK, New York) got the spread of the virus quickly under control (i.e. the number of new daily infections, hospitalisations and deaths) HAD begun to fall. 


These three positives have underpinned a notion that the global economy should be able to swiftly recover from the pandemic, the so-called V-shaped recovery everyone has been talking about. 


One of the analysts I follow on twitter gave an excellent analogy today; he described these three factors that have supported the recovery in risk appetite as the three legs of a stool. If you remove one, the whole thing collapses. 





That is exactly why this stock market sell off might be different. 


Dips seen in the stock market over the past few weeks/months have largely been to do with things like bad data, or US/China tensions. In both cases, investors have looked back to these three key underlying fundamentals and said, everything is still all good, let's buy the dip. 


But this stock market dip is different. 


One of the legs of our stool is under threat. Number 3 to be precise. 


As noted in the blog earlier on today, evidence is growing of a pick up in the rate of spread of Covid-19 in some parts of the US that have already re-opened. 


In other words, the dreaded “second wave” of Covid-19 appears to be rearing its head.


Does this mean further lockdowns are inevitable? 


Sector performance in the stock market certainly tells that story - airlines have been crushed today. Think about it, are Americans really going to be flying again if a second wave kicks off in the US?


It is worth noting that, globally, the rate of spread of the virus has actually been picking up for a few weeks now, but in countries like Brazil, Russia and India (not “key” economies in the eyes of markets). 


Watching spread rates State by State in the US is now going to be a staple of all stock market investors. 


Here is the latest data:


- Texas on Wednesday reported 2,504 new coronavirus cases, the highest one-day total since the pandemic emerged.


- A month into its reopening, Florida this week reported 8,553 new cases (the most of any seven-day period). 


- California’s hospitalizations are at their highest since May 13 and have risen in nine of the past 10 days.


- Florida reported cases rising by 2.5% on Thursday, above the 7 day moving average of 2% per day. 


Should the data continue to show a pik up in US Covid-19 cases in already reopened states, expect risk assets to see further downside.

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