The US economic recovery will no longer be dictated by the government’s “stringent” lockdown policies but individuals’ own behaviours regarding coronavirus, according to Invesco chief global market strategist Kristina Hooper.
The US has had a polarised experienced when it comes to the coronavirus crisis.
On the one hand, the US equity market has seen one of the best rebounds from the March sell-off out of any global market.
Markets' performance YTD
Source: FE Analytics
This market recovery has been largely driven by the outperformance of a few tech/growth stocks that dominate the S&P 500, such as Apple, Amazon and Microsoft. These companies have thrived under the lockdown restrictions, as people and companies have relied on internet and tech for working from home and communicating.
This rally has been so strong that the index has already exceeded its pre-coronavirus high.
Just a few months ago, the S&P 500 went through the shortest bear market in history, dropping from 3,386 points to 2,237.4 points on 23 March, falling by 20 per cent as the coronavirus pandemic spread.
By August, the index was up to 3,390 points, surpassing its previous all-time high set back on 19 February by four points.
This performance has led many to believe that the US market has already fully recovered from the financial impacts of coronavirus.
But this is completely polarised from the state the US economy and society finds itself in today.
Although the US’ grip on the virus has increased somewhat, there has been a major struggle to get the situation under control. There have been just over 6.83 million cases of Covid-19 in the US to date and almost 200,000 deaths. Although numbers do appear to be – finally – on a slow decline.
At the same time, all 50 states have reported a year-on-year increase in joblessness cases. The rate of unemployment in the US has improved towards the end of summer. The national unemployment rate fell by 1.8 per cent in August, according to the latest data from the US Bureau of Labor Statistics (BLS).
According to the BLS: “These improvements in the labour market reflect the continued resumption of economic activity that had been curtailed due to the coronavirus pandemic and efforts to contain it.”
All of this is occurring with the backdrop of a highly contentious US election build-up and undercurrent of social unrest this year.
It’s undeniable that the US economy is nowhere near the level of recovery that the market is.
However, a delay in getting the economy back on track is not going to be down to a government lockdown policy, according to Hooper. Rather, it will be down to individuals’ actions.
Providing its US economic outlook for the last months of 2020, Hooper said that Invesco sees six possible scenarios playing out.
The most likely is the ‘intermediate scenario’ where the US may see some smaller, local lockdowns but no nationwide, more “stringent”, shutdowns. Invesco gives this scenario a 40 per cent chance of occurring.
“Because we’ve learned how to manage it [coronavirus] better, even though in that intermediate scenario, we don’t expect the development of a vaccine this year,” Hooper said. “So it’s all about managing it, and of course our expectation is that we won’t see any kind of major lockdowns going forward.”
Hooper said, along with most countries, the US has moved on from the early, less understood stages of the pandemic when “extreme measures” were taken and everywhere entered “very significant and stringent lockdowns”.
But now it’s a different story. “We are well below that high level of stringency. Measures have been relaxed significantly in almost every country,” the strategist said.
“That tells us that protocol is becoming increasingly relaxed and we’re hearing from governments saying that they no longer expect, if there is a second wave, to go into a higher level of lockdowns. That means that economic activity will no longer be dictated by stringency but will be dictated by personal behaviour.”
Essentially, if mobility is allowed to remain it comes down to an individual’s level of comfort with how much economic activity they’re willing to engage in, rather than the government restricting it.
“If individuals are concerned about their health they can self-isolate, and can essentially self-quarantine and reduce their economic activity,” she added. “That’s important for us as we try to gage what happens to the economy in the midst of Covid-19 before we have a vaccine.”
This economic crisis and recovery are different from any others previously because the solution is not purely down to usual economic activity, according to Hooper.
“This started out as, and continues to be, primarily a health crisis that has bled into the economy,” she said.
This means that other variables are at play in the economic recovery, including infection rates, development of a vaccine and treatment therapies, and the “stringency measures and mobility affecting the economic activity”.
Hence why determining what mobility people will be allowed is crucial for gauging the recovery.
If the ‘intermediate scenario’ does play out, then Hooper said the initial stages of the recovery are likely to be slow, with some possible setbacks. “So we try to describe that as a square root shaped recovery or a Nike Swoosh shaped recovery,” she said.
“We don’t see that V-Shaped recovery, we think that that’s unlikely. But we also think that a W-shaped recovery is very unlikely as well.”
The most unlikely scenario – at 5 per cent chance – is that “there’s not just a second wave, but multiple strong waves that are difficult to control”.
“And that seems very unlikely given where we stand today and how much doctors and medical professionals have learned about treating the virus in just a few short months,” Hooper said.
“I’m not an optimist who thinks that we’re going to get a vaccine sometime this year.
“[But] this is becoming a more manageable and less deadly disease, although it certainly remains a significant issue for populations and for economies.”