Looking at stock market performance of the last few days, you could be forgiven for concluding that the worst of the Covid-19 crisis is behind us. At least from an investor’s point of view. The S&P 500, for example, is up almost 20% since March 23.
I really don’t get the logic behind the rally. I think the markets are being hopelessly optimistic.
Imperial reports
Why do I think that? Let me cite as evidence a report from Imperial College, led by Professor Neil Ferguson (not to be confused with famous economic historian Niall Ferguson). This report, published in mid-March, prompted a change of strategy by UK and US governments. Professor Ferguson and his team looked at the experience of the Spanish flu outbreak of 1918–1920. They warned there would be a disastrous second wave of infections unless governments implemented social distancing measures.
The report also predicted a series of mini spikes in the coronavirus infection rate.
Spikes in the curve tracking infections
We are all now familiar with the phrase ‘flatten the curve’. In the Imperial model, once the number of reported admissions to an area’s ICUs falls below a certain level, social distancing measures can be relaxed. At that point, we can all go back to something approaching normal. Full normality will not be restored for a long time. Until there is a vaccine, any return to work will be accompanied by extensive testing and surveillance.
The reality of exponential growth
I imagine that if it has achieved nothing else, this crisis has rammed home the true implications of exponential growth. I think the markets failed to grasp this in the early days of the crisis. When the penny finally dropped, they suddenly went into a panic.
Until there is a vaccine — which could be a year to 18 months away – there is a risk the virus will start spreading exponentially again.
Mini spikes
The Imperial model assumes that if ICU admissions start to pick up again, then social distancing measures will be imposed again. In other words, social distancing will be like a tap — something you turn on and off. This means the curve that indicates infections includes a series of spikes. The idea is to ensure the spikes are not too high, which is why I call them mini spikes.
We might see a month of relative normality followed by two months of lockdowns — or at least semi-lockdowns.
Investor options
A partial return to normality from time to time will be better than just one continued, uninterrupted lockdown. However, I think the scenario I have just described would still be disastrous for the economy. The markets are yet to price this possible scenario in.
What can investors do? They can look at investing in companies that provide digital services and that may benefit from an acceleration in the take-up of digital technology. They can invest in assets types that tend to do well in a recession, such as government bonds. Or they can wait this one out.
