Risk of Second Wave of COVID-19 Lockdowns

Key Points

  • The biggest political risk facing investors may be the potential for politicians to implement national lockdowns in response to a rise in new COVID-19 cases that could lead to renewed recession and a new bear market for stocks.

  • The prospects for a return to lockdowns appear to be on the rise, pressuring stock prices in September.

  • However, we believe a return to widespread national lockdowns is highly unlikely for three reasons: healthcare systems are not overwhelmed, precision pays off when it comes to the effectiveness of restrictions, and national lockdowns are known to have a huge cost.

Many investors are eyeing the politics surrounding the U.S. elections as a major factor for the market in the coming months. But, the politics of a potential return to national lockdowns in response to the resurgence of COVID-19 cases may be a bigger potential market mover for investors to consider. A widespread return to national lockdowns would likely mean a return to recession for the global economy and a bear market for stocks.

The potential for a return to lockdowns appears to be on the rise, pressuring stock prices in September. U.S. virus cases have started to tick back up again, while parts of Europe are experiencing a steady resurgence. Israel has instituted a second national lockdown. The United Kingdom has rolled out new restrictions. Soaring new cases in France and Spain are prompting politicians to consider similar measures. However, we believe a return to widespread national lockdowns is highly unlikely for three reasons:

  1. Healthcare systems not overwhelmed: Positive cases are rising in many countries, but the percentage of those tested that are positive, along with hospitalizations and deaths from COVID-19, remain relatively low.
  2. Precision pays off: Mid-summer second waves of virus cases in the U.S. and China faded when narrow, localized restrictions were put in place, achieving success while limiting overall economic impact.
  3. Huge cost: The economic and human toll of national lockdowns is now known to be severe; the first half of 2020 experienced the worst global recession since the Great Depression.

Examining each of these leads us to believe a return to widespread national lockdowns and a related return to global recession and bear market is highly unlikely.