David Kostin, of Goldman Sachs’ top stock strategist, has said in a recent note, that investors may limit stock as a coronavirus 2nd wave is predicted.
Will Investors Limit Stock as Coronavirus 2nd Wave is Predicted?
Last month, U.S. stocks fell after fears of a possible second wave of COVID-19 infections.
Goldman Sachs’s head of US equity strategy, David Kostin, believes that investors might reduce how much stock they purchase because of the increased risk, and warnings, of a second wave of coronavirus cases.
While the initial V-shaped recovery has felt hopeful at best, a second wave could make a “W-shaped recovery” if we see an increase in reported cases, and more specifically, additional lockdowns.
The coronavirus outbreak has led to the most severe economic downturn since the Great Depression, with millions of US citizens losing their jobs since stay at home orders were put in place, back in March. Many retirement plans have been ruined, while the turmoil has created a great opportunity for others.
However, global stock markets have rallied, fueled by massive fiscal stimulus, optimism about the steady easing of confinement rules, and central bank policies.
“We expect the potential risk of a viral ‘second wave’, and the fast-approaching US presidential election, will limit a significant increase in equity exposures in the near term,” wrote David Kostin.
With the November 2020 elections also quickly approaching, Kostin noted that the recent historic rally from March lows may be limited as investors weigh the potential threats and upheaval.
Second Coronavirus Wave
The director of the National Institute of Allergy and Infectious Diseases, Dr. Anthony Fauci, thinks a second wave of coronavirus infections is “inevitable.”
The virus “is so transmissible, and it is so widespread throughout the world, that even if our infections get well-controlled and go down dramatically during the summer, there is virtually no chance it will be eradicated,” Fauci said in an NBC interview recently.
“If, by that time, we have put into place all of the countermeasures that you need to address this, we should do reasonably well,” Dr. Anthony Fauci said. “If we don’t do that successfully, we could be in for a bad fall and a bad winter.”
The election results could be delayed because coronavirus concerns could lead many voters to ditch the polling stations and instead cast their votes by mail.
The 2020 election took 35 days to decide the winner in a different complicated situation, so “we see heightened risk that election-related volatility could extend beyond Election Day,” Kostin said.
Kostin said “In a close election, it will take time to count — and invariably recount — all the mail-in ballots,” creating enormous doubt, and investors famously dislike uncertainty.
“The surge in retail trading activity has amplified the market rotation toward cyclical and value stocks,” said Kostin.
Investors have flocked back to risk assets that have rebounded stocks from record March lows. The S&P 500 is only around nine percent lower than February, pre-crisis highs, and with “some additional room for equity allocations to rise, and cash allocations to decline, until they reach pre-crisis levels,” Kostin noted.
He went on to mention that there is merely a “modest upside risk” because of the uncertainties of a second wave of COVID-19 and the forthcoming 2020 elections.
As seen before, it is likely that another wave of the virus and the potential of a new President will bring further economic chaos, but the extent remains to be seen.
Summary of Kostin’s Beliefs
- Investors may limit stock as a coronavirus 2nd wave is predicted
- This will likely hold back any further room that the equity rally has to go
- The S&P 500 will trade in a range of 2,750 to 3,200 for the rest of 2020
- This will signal about 3% upside at most from current levels
- Periods of elevated policy uncertainty have generally coincided with lower-than-average equity allocations during the past 30 years