• A non-linear and heterogeneous recovery, until we have a vaccine

The underlying global economy is struggling to regain momentum. New lockdowns and social distancing measures mean the recovery in demand is non-linear and heterogeneous, ie it resembles two steps forward and one step back, while different countries, and regions within countries, are recovering at different rates. This should not surprise readers of this note, since we have been favouring a U-shape over a V-shape recovery for some months now, for this very reason.

What has been surprising, and disappointing, is the politicisation of public health control issues -such as lockdowns and the wearing of face masks- in some countries.

Lab results over the last ten days suggest a reasonable expectation of a vaccine coming from Oxford University and/or Moderna (of the U.S) by early next year, from when we can expect the global economic recovery to become linear, heterogeneous and normal economic life for most people to have resumed by next summer.

• Corporate earnings

But as demand returns to pre-crisis levels, perhaps first in parts of Asia and Europe -such as China and Germany- we expect to see a relatively sharp recovery in corporate earnings. Cost-cutting measures will result in higher profit margins than before the crisis (this is a normal feature of an recovery in the economic cycle).

We might Asian and European stock markets start to outperform those of the U.S on a consistent basis, given the likelihood of a quicker recovery in corporate earnings in cyclical sectors, and cheaper valuations.

• A long tail of U.S stocks to continue to underperform tech and healthcare?

Meanwhile the U.S stock market might see a still greater bifurcation. A handful of large (in terms of market cap) growth-orientated sectors, such as tech and healthcare, that have had a ‘good’ crisis, may continue to benefit from a delayed return to normality in the U.S and to structural changes in global work and leisure habits that the crisis has generated. The NASDAQ may reach new highs over the coming months.

But the wider U.S stock market, which contains a large number of relatively small and economically sensitive sectors, may struggle to sustain investor enthusiasm if renewed lockdowns push a resumption of corporate investment spending, high street shopping, travel and socialising further into the distance. These sectors will need to see covid-19 rates plummet in the U.S. This in turn would require greater compliance with lockdowns, social distancing measures, and mask wearing, in a less politically divisive atmosphere.

How long, for instance, before the U.S restaurant and travel sectors returns to normality?  Probably longer than in Germany, where early adoption of public health measures in a non-political environment- has meant relatively few covid-19 cases, and a near-return to normality in the restaurant sector.

• Seasonal volatility

It is often hard to distinguish the reasons for market volatility. But investors should be wary of reading too much into bouts of volatility during the northern hemisphere holiday season, for a very human reason. There tends to be less trading done from mid-July through to early September, as market players head to the beaches. This reduces liquidity in stocks, which in turn can increase market volatility. Admittedly, this year beaches might be replaced by gardening and walks in the local countryside.