By Chris Matthews, MarketWatch
U.S. stocks haven’t flinched in recent weeks as the coronavirus epidemic claims hundreds of American lives daily, the U.S. and China standoff threatens global trade and civil unrest sweeps through American cities in response to the alleged killing of George Floyd, a black man, by Minneapolis police.
Though it may seem that any of these factors might put a dent in U.S. equity prices, analysts and investors interviewed by MarketWatch said that improvement in the COVID-19 health crisis and the of gradual lifting of related economic restrictions is enough to support stock prices in the face of largely non-economic protests and geopolitical conflicts.
“Despite that we’ve had a lot of negative headlines over the past weeks, markets are still pretty focused on the fact that the economy is continuing to reopen across the nation,” Wayne Wicker, chief investment officer at Vantagepoint Investment Advisors, told MarketWatch. “We’re starting to see small and large businesses opening up along with extremely low financing rates. The market is enamored by the Fed and the Treasury pushing a lot of liquidity into the system.”
Congress has approved an nearly $3 trillion in stimulus spending to combat the economic impact of coronavirus, and is considering more, while the Federal Reserve has pledged to backstop everything from corporate credit to municipal bonds, while engaging in indefinite purchases of U.S. government debt and mortgaged-backed securities.
Meanwhile, investors are viewing the protests in cities across the country as phenomenon that won’t directly impact corporate profits, while the ultimate political impact of the unrest remains to be seen.
“Right now it’s limited enough that it’s not perceived as having a meaningful economic impact,” said Willie Delwiche, investment strategist at Baird. “The risk to the market right now is excessive optimism,” and headlines from protests could simply be dampening that optimism a bit, he added.
On Tuesday, the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -1.51% gained 1.1%, while the S&P 500 index /zigman2/quotes/210599714/realtime SPX -1.08% rose 0.8% and the Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP -0.86% added 0.6%. So far in June, the Dow is up 8.5%, the S&P 500 8.8% and the Nasdaq 11.7%, according to FactSet.
Stock-market bulls also point to past instances of social unrest as evidence for optimism. “History shows there is simply no correlation between social/political turmoil and U.S. stock market returns,” wrote Nicholas Colas, co-founder of DataTrek Research, in a Monday note. He pointed to President Bill Clinton’s impeachment in 1999 and the Occupy Wall Street protests that began in 2011 as examples when discord coincided with positive returns on equity.
The most compelling example, however, may be the historically tumultuous year of 1968, when America and the world were gripped by political and military crises, but stocks did just fine.
“1968 saw two high profile political assassinations in the U.S., the Tet offensive in Vietnam, the start of the Hong Kong flu pandemic, riots in Chicago at the Democratic Convention, and the shutdown of the French economy from mass protests,” Colas wrote. “The S&P 500’s total return in that year was 10.8%.”
What does seem to be pushing markets higher, Baird’s Delwiche said, is the improving data related to coronavirus outbreak in the U.S. and the economy. “The market isn’t looking for good news or bad news, but the direction the news is going.”
Of course, at a certain point investors will demand more than just news of economic restrictions being lifted and an improvement in the health situation — they’ll need to see that improvement manifest in hard data. “The improvement in the macro environment has been the easy parts,” wrote Tom Essaye, president of the Sevens Report, in a Tuesday note to clients.
“Governors declared states to reopen and virus cases have declined,” he added. “Now comes the hard part where the economy needs to start moving again and we need to see massive and rapid improvement in economic numbers, all the while not having any hints of second wave of infections.”