Is the Stock Market in Jeopardy from a Rising tide of illnesses
Back Down the Rabbit Hole: What the Continuing Covid Collapse Augurs for the Stock Market
“TSA airport screenings drop to lowest since May as travel and fares fall...” — CNBC
Dismaying evidence that the Coronavirus, particularly the Delta variant, continues to spread rampantly raises a host of important questions. Among them is one of particular interest to investors.
As evidence mounts that surging infections and lockdowns are beginning to depress economic activity, what does this imply for the stock market?
An analysis last year in the Harvard Business Review captured the received expectation about how the coronavirus pandemic would affect the economy:
The coronavirus pandemic and ensuing global lockdowns led to fears of a systemic meltdown. Still, the recovery in the U.S. and around the world has been stronger — and faster — than many predicted. But will it last? Looking at the sectors of the U.S. economy more closely, we can divide it into three parts that were impacted very differently: Sectors that were largely unaffected by Covid (ex: finance and housing); sectors that were impacted by lockdowns, but not social distancing that bounced back relatively quickly (ex: autos and durable goods); and sectors that are (sic) won’t be able to meaningfully recover until there’s a vaccine (ex: hospitality, travel). We’ve exhausted mainly the “easy” phase of the recovery, and the next leg hinges on that third group of sectors. Recovering Faster Than Expected by Philipp Carlsson-Szlezak, Paul Swartz, and Martin Reeves November 03, 2020.
The crucial question qualified this shrewdly observed analysis, “But will it last?” There are growing hints that the answer may be “No.”
Witness the CNBC report of a renewed collapse in air travel.
Sales of vehicles have also dived. Ford’s best-selling F-150 trucks, for example, posted a year-over-year drop of 33.1% in August. Total auto sales last month slowed to an annual rate of a bit more than 13 million cars. This compares to a sales pace of 18.5 million vehicles in April.
Little wonder that General Motors is idling six plants this month, including four in the U.S.
Toyota is instituting a 40% production cut worldwide this month.
Ford, meanwhile, is idling its Kansas City plant, where it produces the Ford F-150 and the Ford Transit.
The Associated Press reported in August, “Virus surge makes U.S. weak link in local economic recovery.” With the U.S. accounting for 22% of global retail sales, compared to 14% in China, there could be serious contractionary feedback from the downdraft in U.S. retail sales. That danger appears to be increasing.
Hints that the economy is weakening again are there for you to see. You know that the stock market is a discounting mechanism. What reaction should you expect as real growth weakens?
Obviously, there is a critical link between economic development and stock markets. The stock market devalues the future cash flow produced by businesses whose stock is traded.
There was no relationship between the economy and stock values in profoundly impoverished countries, like the Central African Republic (Gross National Income) GNI per capita of $663. Afghanistan and Zimbabwe could sport multi-trillion-dollar stock market valuations.
What is the relationship between the strength of the economy and the stock market?
An Israeli study showed recently that vaccinated people were 13 times as likely to become infected and 27 times as likely to have symptomatic infections as people with natural immunity.
This study further questions the credibility of relying on vaccines, given that the study showed that the vaccinated were ultimately 13x as likely to be infected as those who were infected previously and 27x more likely to be symptomatic.