Oy Vey, What Now?

The shortened holiday week got a shock this morning when stock markets around the world dropped precipitously on news that a new strain of the coronavirus is emerging in South Africa. This new strain, with much still unknown about it, seems more impervious to vaccines currently on the market. The immediate reaction in financial markets is to revert back to the playbook from early spring 2020. “Stay at home” stocks and bio-pharma stocks lifted off as did the prices of long-term US treasury bonds. All of the “opening” stocks took a dive. The price of Zoom stock jumped over 10% on the open, while Royal Caribbean Cruise Line dropped over 10%.

It remains to be seen if this is just another final “jump scare” seen in classic horror movies when you suspect the monster is dead but reaches out for one last fleeting attempt to wreak havoc. Unfortunately, at this stage of the movie, it’s not so much a matter of whether or not this new strain is indication of the never-ending nature of the virus but how governments around the world will react. Will lockdowns that are resurfacing in Europe resurface here? What will be the Federal Reserve’s response? What impacts will new lockdowns or reemergence of an impervious strain of the virus have on the already clogged supply chains? Will continued supply chain disruptions add to inflation pressure at a time when the Fed is less likely to take policy action to combat inflation?

Today may be a shortened trading day in a shortened holiday week, but the market reaction reminds us that there are no simple answers to the questions posed above. The Fed and the global economy seem stuck between the proverbial rock and a hard place. I fear that the lack of clear answers will lead to a knee-jerk response to provide any answer. One thing that politicians get hammered at the polls for, as we enter an election year, is the appearance of doing nothing—even if nothing may be better than something. To prevent a potential deflationary environment, read recession, caused by a yet undetermined impact from a new strain, we may see actions that lead inevitably towards greater inflation.

Market reaction today is decidedly negative. But near to medium term reaction from the market may turn from fear of COVID part III towards greed of Quantitative Easing and Fiscal Stimulus Infinity. For now, I’ll take today for what it is: a lower liquidity, shortened holiday trading session with the potential for longer term policy responses that may or may not prove beneficial.   

Thanks for reading,

Zach and Dave

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