This archive report was first published on 26 June 2020.
Published on June 26, 2020, a long-feared resurgence in coronavirus infections is putting the US stock rally to the test. Investors have been warning about the potential rise in coronavirus infections as a stumbling block to the rally in US stocks.
California, Texas, and other US states have seen significant jumps in coronavirus infections this week, even as areas like New York appear to have curbed their infection rates. Despite this, many market participants believe that hard-hit US states are unlikely to reinstate economically devastating lockdown measures implemented earlier this year.
However, the increase in cases threatens to slow economic activity and undercut the case for a 'V-shaped' recovery that has helped extend the massive spring rally in stocks. The S&P 500 is up 36 per cent from its late-March low, while the Nasdaq made its most recent record high on Tuesday.
“All this week, we’ve been hearing how it’s going to get worse. The facts seem to be supporting that narrative,” said Brian Battle, director of trading at Performance Trust Capital Partners, referring to the virus.
Stocks shuffled between gains and losses Thursday, with the S&P 500 falling 2.6 per cent on Wednesday and oil prices tumbling more than 5 per cent after the US recorded the second-largest increase in coronavirus cases since the health crisis began.
Arizona, California, Mississippi, and Nevada had record rises in coronavirus infections on Tuesday, while Texas set an all-time high on Monday. The governors of New York, New Jersey, and Connecticut announced that visitors from states with high infection rates must self-quarantine for 14 days on arrival.
“Even if it isn’t mandated by the government to stay home, people aren’t going to be comfortable going out. They’re not going to be out and about shopping,” said Thomas Simons, money market economist at Jefferies.
The threat of a slower recovery has put the spotlight on valuation concerns that have arisen as stocks marched higher. A record net 78 per cent of fund managers believe the stock market is at its most overvalued since 1998, according to a June survey by BofA Global Research.
Many investors believe that expectations of continued support from the Federal Reserve and stimulus from US lawmakers will limit the downside in markets. Congress has allocated nearly $3 trillion in financial relief, while the Fed has implemented numerous programs to pump trillions of dollars of credit into the economy.
“Virus-shock challenged fundamentals have quite possibly been more than offset by a blunt-force global policy response,” analysts at BlackRock said in a recent report.
