The stock market's moves show investors are prepping for a second wave of virus cases that could crush the economy at a crucial turning point.
It has been three months since the stock market crashed and the pandemic forced the U.S. economy to grind to a near halt.
The repercussions of the lockdowns can be felt across all sectors as job losses and pay cuts continue to plague much of the workforce. But there’s good news: the American economy is about half-way back to its pre-pandemic state.
Jefferies has developed a U.S. Economic Activity Index that uses close to real-time indicators to assess the health of the economy. This week, the index showed that America is on the mend.
Retail foot traffic is just 16% away from where it was in February, traffic congestion was nearly half of its normal level, and restaurant bookings are at 40% of their pre-virus levels.
So, is it time to jump back into the stock market? Can this rally march even higher?
Maybe, but probably not. Notably, the Jefferies data show that hiring was flat this week compared to last week’s figures. Job postings remained at roughly half of their normal levels, indicating employers may be hesitant to ramp up hiring just yet.
There are a few reasons for that. One could be the exorbitant cost of prepping your business to operate in a pandemic.
Studies show it costs roughly $300 per employee to keep everyone safe during the pandemic. As most businesses aren’t able to serve customers to capacity amid the regulations, that’s a considerable expense. It means that many business owners want as few employees as possible.
Perhaps the more significant, more worrying risk that’s plaguing U.S. businesses as well as the stock market rally is the threat of a resurgent pandemic.
The writing is already on the wall in the U.S., where a massive spike in cases in many states suggests lockdowns are the only way to stop its spread. Some employers could be taking a ‘wait-and-see’ approach to hiring rather than stretching their budget.
Employers aren’t the only ones who are spooked by the potential of a second wave. Investors appear to be doing the same.
Just a few weeks ago, investors were throwing money at travel stocks as the outlook for the economy brightened. But this week cruise stocks fell considerably, and airline stocks did the same. Meanwhile, stay-at-home stocks like Zoom Video Communications (NYSE:ZM) have seen their share prices rise.
There could be trouble ahead if institutional investors pull back from the market. That was evident in the first quarter when pension funds took $119 billion out of the stock market.
Goldman Sachs sees the second quarter bringing on more selling as fund managers rebalance. The firm is expecting some $76 billion worth of stock sales in Q2.
That’s when conviction comes in. The hordes of retail investors who’ve rushed into the stock market in an era of low-fee trading will be faced with a choice—ride it out or get out while you can. If the vast majority start to sell as the dominoes begin to topple, it could be the February stock market crash all over again.