Assessing the Pandemic's Long-Haul Impact on the Markets
After over a year of Covid-19 being classified as a pandemic, there is increasing evidence that the disease can have lasting effects on some people. These “long-haul” patients experience symptoms, in some cases, for months after contracting the disease. It is not yet known why some react that way and others don’t, nor how long the symptom typically last in those cases, but it has raised fears that Covid will be with us for a lot longer than most people have anticipated.
This is and will continue to be a human tragedy that should not be forgotten, but my job here is to look at the possible economic and market impact of what is going on in the world. In that context, the question is whether or not there will be any long-haul effects on economic conditions or the markets, and so far, the answer seems to be no.
The first evidence for that is the obvious: The S&P 500 recovered all of its losses five months after hitting its low, and continued on upwards since, hitting new all-time highs in the process. Yes, there have been a few retracements in the process and yes, an argument can be made that the current multiples suggest that the bounce has gotten a bit ahead of itself, but we wouldn’t be where we are if there was evidence of real, lasting damage to the economy.
The notion that what we experienced was a short, sharp shock than permanent damage is supported by research into similar past events. Research by Natalia Martin Fuentes and Isabella Moder, economists at the European Central Bank (ECB), suggests that a full and rapid recovery from shocks to the system like this is the norm, whereas the damage done to the system by crises of its own making, such as the financial crisis in 2007/8, lingers, often for decades.
That is important context when assessing whether or not current levels represent an overshoot of the logical mark, or even a bubble that is about to pop. The work of Fuentes and Moder suggests that this a short, sharp recovery within a longer, broader recovery, so hitting new highs is just making up for lost time in that protracted bounce back and is really nothing to worry about. It is an acceleration of an existing trend, fueled by fiscal and monetary stimulus being added to an already strong recovery.
The same theme of the pandemic accelerating an existing trend is true of the changes in economic behavior that have happened over the last year and are expected to outlast the disease. Your view of that, I suppose, depends on your view of those emerging trends before the pandemic.
If you believed that increased automation and the associated productivity increases was a good thing, then you get more of the same. If, on the other hand, you focused on the fact that the immediate negative impact of those changes fall disproportionately on the young and people of color, as this Brooking research points out, your focus will be on the fact that this trend too is now accelerating.
This will sound harsh, but the truth is that the market doesn’t care about the impact on equality and won’t do so until the growing pool of impoverished people drags down growth. The cold reality is that the stock market is ultimately driven by corporate profits, and anything that increases them will produce a positive reaction, regardless of how it may impact some people. Given that, the acceleration of productivity increases that have resulted from Covid are, ultimately, a good thing in market terms, at least.
There are some ways in which the pandemic will have slowed the progress towards what was once considered desirable or will change behavior for good. For example, I don’t think that the trend towards online learning will strengthen or even continue once normality returns, and it will take time before handshakes bounce back. The existing trend towards remote work will also accelerate, with the possibility of long-term negative effects on the commercial real estate market. However, that particular long-haul impact will be contained to specific areas and/or will have little or no impact on stock prices.
So, while Covid-19 and its variants will probably be with us for some time as a society and its effects will linger in some individuals, the market impact will most likely not drag on.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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