Virus Threat Overshadows Election, Earnings in Market Selloff

The U.S. presidential election has kept markets on edge for months, but with just days to go until the vote, it was the year’s other dominating story that reclaimed its hold on investor sentiment.

A surge in coronavirus cases and the attendant concern that economic growth will slump drove the S&P 500 to its worst day since June. Investors dumped shares of companies that need a robust recovery, with an index tracking airlines tumbling more than 6% and a gauge of restaurants sinking 3.6%. The Cboe Volatility Index jumped to its highest level in four months, while the yen rose.

For now, hope remains that a repeat of the human tragedy that came with the spring outbreak in the Northeast can be largely avoided. But signs are mounting that governments will have to reimpose some restrictions in hard-hit areas, threatening the incipient economic recovery that lifted stocks all summer. Those concerns once again have analysts turning to medical statistics and virology experts for data to underpin their investment decisions.

“Covid-19 is the most-important macro story,” said Tom Lee, co-founder and head of research at Fundstrat Global Advisors, and in some aspects is “more important than the Fed.” He added that the surge in cases coupled with the delay in fiscal stimulus has weighed heavily on the market.

Needless to say, the days before a presidential election aren’t normally like this. Investors would usually focus on which policies from candidates are best for their portfolios. Earnings are pouring in, and while they matter, what matters more is whether the spreading virus will slow economic activity. For that, Wall Street turns to epidemiological charts and real-time economic signals. Analysts and money managers spend days tracking everything from Covid-19 reproduction rates to the number of restaurant reservations on OpenTable.

Virus Threat Overshadows Election, Earnings in Market Selloff

For a third straight day, a basket of stay-at-home stocks that includes supermarket-chain Kroger Co. and packaged-food giant General Mills Inc. outperformed one stuffed with firms that are best positioned to reap the benefits of the recovery.

To be sure, it’s impossible to ascribe the market’s decline to worsening virus trends alone. Investors have plenty else to fret over, including Congress’s failure to put forward a new aid bill as well as uncertainties over the looming U.S. election. But with the latest negative developments on Covid-19, many traders are once again growing anxious.

Europe’s leaders announced harsher pandemic measures as the virus roars back across the continent. Spain, Italy, the U.K., Greece and Portugal all reported record numbers of new cases on Wednesday. French President Emmanuel Macron ordered a new national lockdown, though schools will remain open. German Chancellor Angela Merkel will impose the toughest restrictions since this spring -- closing bars and restaurants in Europe’s largest economy. And Switzerland shuttered nightclubs and imposed other new limits.

Virus Threat Overshadows Election, Earnings in Market Selloff

At the same time, the disease has been proliferating wildly in the U.S., where the number of confirmed cases surpassed 8.8 million -- the highest cumulative count in the world. New York virus cases topped 500,000, while hospitalizations in neighboring New Jersey exceeded 1,000 for the first time since July. Overall, hospitalizations related to Covid-19 have spiked at least 10% -- after stalling for months -- in 32 states and Washington D.C. in the past week.

“We’ve been seeing higher caseloads in the U.S., and now with the higher caseloads in Europe, we’re going to see additional restrictions,” said Chris Gaffney, president of world markets at TIAA Bank. “Investors are worried about what these restrictions will do to the recovery that is chugging along.”

Covid-19 case counts are climbing at an alarming rate across the nation as some indicators point to moderating activity in October, Bank of America Corp. economists Stephen Juneau and Michelle Meyer wrote in a note last week. Though air travel has firmed in recent days, several other gauges -- such as labor-market figures and data on seated diners at restaurants -- have flagged.

“The risk is that the worsening virus situation hinders the economic recovery,” they said. “Moreover, we fear that states that have experienced relatively stronger economic recoveries are those currently experiencing the most severe virus outbreak,” which may lead to an increase in voluntary social distancing or even activity-restricting mandates.

Virus Threat Overshadows Election, Earnings in Market Selloff

High-frequency numbers are signaling a slowdown in activity after a strong rebound, due to waning fiscal support and an uptrend in Covid cases, according to Jim O’Sullivan and Oscar Munoz, strategists at TD Securities. Data from Homebase, a scheduling tool used by thousands of businesses and about 1 million hourly workers in the U.S., suggests a stalling in non-seasonally adjustment employment. Credit-and-debit-card data are pointing to flattening in consumer spending, and a recent uptrend in OpenTable restaurant-reservations appears to have paused as well, they wrote in a note.

“Lately, things have turned for the worse almost everywhere. It makes me think no one really knows, and that recreates uncertainty,” said Randy Frederick, vice president of trading and derivatives for Schwab Center for Financial Research. “If things don’t get a whole lot better in Q4 we could be looking at a net-negative year for GDP.”

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