Quarantine Trade Part Two Won’t Be As Good As The Original

Between Monday’s big tech resurgence and yesterday’s beatdown of consumer travel and cyclical stocks, the market this week seems to be preparing for a second wave of the summer quarantine trade. Does Quarantine Trade Part Two make sense?

The market’s gravity-defying rally from April to September was a combination of several things: an unprecedented injection of monetary and fiscal stimulus, a worldwide and sudden demand for the latest technology to sustain work and entertainment, and a steady natural recovery from and understanding of COVID-19.

Right now, we’re missing almost all of those ingredients, notably the stimulus. A political narrative is building about what kind of stimulus is coming post-election, but that time-frame is unclear. How far post-election? Nov. 4? Inauguration? It stands to reason the improvement in the economy since March means we may not need as big an injection as CARES to have a similar effect on the market, but without it, it’s also fair to say the market would need something surprising on the virus battle to offset limited stimulus. Right now we don’t have that either. While our flare-up in cases over the last few weeks does not look too alarming yet, Europe’s is much more unsettling. There have also been a few setbacks in vaccine and treatment trials the past week.

As far as the cloud and tech stocks that investors are piling into again, they are not immune from sustained economic weakness. While demand for their products and services were pushed forward the last six months, there is a utility curve to this concept and its peak is likely approaching. Rate of new demand should slow if struggling businesses are shuttering and thriving ones have already signed up for the products they need. The same applies to consumer tech — if you haven’t already bought a $2,000 Peloton, are you going to this time around?

As any moviegoer knows, the sequel is rarely as good as the first. In this case, the market’s debut flick was a 78% rally and soaring record highs. It may not mean we’re in store for Speed 2 or When Harry Met Lloyd, but the first quarantine trade hit harder than Rocky 1, and that’s a tough original to beat.

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