The Most Important Covid-19 Chart For Markets Is One You’ve Never Seen
With Covid-19 curves raising alarm bells in Europe, Canada having containment issues, and New York State’s infection rate ticking back up, the virus has made its way back into investor discourse after a few months of steadily down-trending domestic case-counts. For some, it’s an explanation for recent volatility. In this post I’ll make the case that after the election, Covid-19 is actually going to be a key suppressant of volatility.
The data at the core of this view come from Sonal Desai, the chief fixed income strategist at investment manager Franklin Templeton, whose team has been conducting extensive surveys (10,000+ respondents) on Americans’ perception and reaction to Covid-19 and the ensuing economic dynamics. It’s two charts, actually, that characterize how respondents feel about the threat of the virus. The first shows respondents have a hugely inaccurate view of who is most susceptible to the virus. They estimate nearly 20% of Covid-19 deaths have occurred in victims below the age of 34. It’s actually less than 1%. Order of magnitudes wrong. That’s literally crazy. The second one shows another version of the same idea, that people of all ages hold roughly the same degree of fear of having major health consequences, despite what science suggests should be the case.
Yet currently in most of America, age plays very little role in federal or state restrictions surrounding quarantine rules and best practices. It is quite fair then to say current policy does not make sense according to the science.
What’s this have to do with the market? Right now, almost every guest of mine is pointing out the “election kink” in the VIX futures curve (the markets’ assessment of S&P 500 volatility on a monthly basis) between October and November. One way to interpret that is that the market expects the election to be a volatility-inducing event. Typically, such a rise in VIX would mean a drop in stocks (like 75% of the time).
The consensus explanation is that this reflects heightened odds of a contested election result, some kind of big surprise or regime shift, or possibly more accurately put: it seems like a really big election, and people are betting something weird will happen.
But that’s all speculation. Here’s what we do know: Covid-19 and the response to it was the original source of volatility in the market. And here’s what we also know, thanks to the Franklin Templeton study — ready? Buckle up, cause here’s the real kicker of their survey. According to Desai, “People who get their information predominantly from social media have the most erroneous and distorted perception of risk. Those who identify as Democrats tend to mistakenly overstate the risk of death from Covid-19 for younger people much more than Republicans.” They go on: “according to our study, political affiliation is as powerful as age in predicting whether someone would be likely to eat at a restaurant indoors; Democrats have roughly the same willingness to eat in a restaurant at 25% capacity as Republicans do in a restaurant at full capacity.”
The logic for why this information is so crucial for markets goes like this:
If you believe a return to normal life is the most important thing to economic stability and reduced market volatility, then, due to the politicization of the Covid-19 reality, it stands to reason a quickened return-to-normal will take place after the election, regardless who wins. If we assume the asymmetric, inaccurate fear of the virus by Democrat respondents is due to an inaccurate narrative spun by political media during an election season, it’s pretty safe to assume its influence on individual decision-making will wane, or possibly reverse. If Trump wins, the need for the narrative is greatly reduced, and the President will continue to push for normalcy. If Biden wins, the need for the narrative is also reduced, and could even lead to reversal, as no sitting president wants a bad economy. The people who have properly understood the risks will continue to go out, and the people who have wrongly been in fear will be offered a new reality.
Nobody wants coronavirus, and few argue it was wrong to try and figure out how to minimize its impact. But the scenario is different today, and Desai’s study is powerful evidence that our reality has been skewed by politics. No matter who wins, Nov. 3 will mark the beginning of the end of misinformation, and thus a quicker clip to return to normal, recovery for the economy, and gradual decline in volatility.