So far, most investors have viewed the easing of lockdown measures as a big positive for markets.
The latest: The S&P 500 finished the week 3.5% higher, up 31% from its March 23 low.
It’s true that for the economy to begin climbing out of a sharp recession, businesses must be allowed to reopen and restrictions on movement have to be lifted.
But reopening also carries with it fresh risks. A second wave of infections would reverse recent market gains and optimism about an economic recovery if it triggers another round of bruising shutdowns. Without a vaccine, it’s hard to say for certain what the next chapter holds for riskier assets like stocks.
“If one of the vaccines [or] treatments being testing currently proves effective, we are a buyer of risk assets,” Evercore ISI portfolio strategist Dennis DeBusschere said in a recent note to clients. “If human ingenuity fails or there is a significant resurgence in the spread of the virus, we will be sellers of risk.”
Investors should keep this in mind as more restrictions start to phase out. Spain gradually began to ease its lockdown last week, while Texas and Georgia have allowed some businesses to reopen. UK Prime Minister Boris Johnson will give an update on the country’s quarantine measures on Sunday, while France starts the process of lifting stay-at-home orders on Monday.
James Smith, developed markets economist at ING, noted that the risk of a resurgence in infections will likely weigh on any economic rebound. That means activity may not pick up as much as expected.
“Both firms and consumers alike are likely to remain very cautious until the situation has passed entirely,” he told clients.
The recent boost to markets has as much to do with unprecedented support from central banks as it does bullishness about reopening. Interest rate cuts and massive bond-buying programs have improved financial conditions and helped markets recover.
Still, Citigroup economists Igor Cesarec and Catherine Mann think this can only distract from the “dire economic reality” for so long.
“Since it is not clear that markets can be propped up indefinitely, caution is warranted,” they said in a recent research note. “Risk assets could be fragile once the cold, hard economic reality hits again.”