An example of that shift is the questions I get on a daily basis from clients and advisors. Until the past couple of weeks, they were all about the pandemic: Is it getting worse? When will it get better? Recently, though, the questions have been about the election. Who will win? What will it do to the markets? Investors seem to have largely processed the pandemic itself, concluding the current improvement will continue, and have moved on to other worries.
The same holds for the economy. Retail sales have now recovered to pre-pandemic levels, the housing market is booming, and business confidence and investment are all the way back. The one real exception to this recovery is consumer confidence. But this factor seems to be tied not directly to the pandemic itself but to federal policy, specifically to the end of the supplemental federal unemployment payments. While certainly related to the pandemic, it is really a pocketbook issue rather than a medical one. So, again, we’re seeing a return to normal worries and away from the pandemic.
That kind of complacency is what has driven markets back to new highs, supported by the factors we discussed yesterday. The question is whether that complacency is warranted.
For example, we saw recovery in confidence and spending through mid-June, when conditions were comparable to now, only to see them drop off again when the second viral wave started to hit. The current recovery is just as vulnerable as the last one was to a resurgence in infections. With schools reopening and with people starting to abandon social distancing, we could well see a third viral wave. Confidence and spending recovered strongly from the first wave and somewhat less strongly from the second wave. Recovery from a third wave could well be even weaker.
Even without a third wave, less federal stimulus will likely act as a headwind to a faster recovery. Much of the spending that has driven the recovery thus far is likely to wind down. Economic damage, in the form of foreclosures and evictions, was postponed by the federal aid, but it is likely to now start showing up in the statistics. The drop in consumer confidence could be a leading indicator that is now starting to happen.
The takeaway here is that even if the medical situation continues to improve, and that is by no means certain, economic risks that have been subsumed by governmental stimulus may be starting to resurface. As markets assume the pandemic is under control, they also implicitly assume that means the economic damage is fading as well.
As we get the virus under control, assuming that continues, it does not mean the pandemic crisis is over, just that it has moved from the critical phase to the recovery phase. Recovery from the virus, as we have learned, is not necessarily fast and easy but is often drawn out and painful. There is a real chance that the economic recovery will face the same risks. Markets are expecting a fast recovery. That may be, but we have to plan for the alternative as well.