Bracing For A Second Wave: What Investors Should Expect From A Coronavirus Resurgence

In March, the coronavirus hit the global economy like a freight train. 

While lockdowns confined as much as half of the world's population to their homes, stock markets were in free fall in the second half of March. On March 23, the Dow Jones Industrial Average was down 35% year to date, the S&P 500 31%.

Travel and energy sectors were particularly hard-hit: Shell just announced taking a $22 billion hit, and many airlines around the world had to rely on vast government bailouts.

Since then, there has been a steady recovery in most sectors, with stocks rising continuously, albeit often slowly. By the end of June, the DJIA was down only 3.6% year to date, with the S&P 500 up 4.7%.

Further encouraging signs for a steady economic recovery appeared at several points along the way. A June report by the U.S. Bureau of Labor Statistics, for instance, showed the unemployment rate decreasing again, a trend that is still continuing.

Beyond this tentatively positive outlook, the threat of a second wave of COVID-19 looms on the horizon. Case numbers are climbing again in countries that had seemingly beaten the virus, and consequently eased restrictions.

The first wave of infections briefly receded in the U.S., but as it now rises towards a new crest, investors contemplate the future. And ask themselves what they can expect from it.

Are We Already Seeing a Second Wave?

The central question that most calculations hinge on is this: How likely are we to see a second wave of the virus?

And: Are we already seeing it?

In the U.S., record-breaking daily new case numbers are being reported. This follows the reopening of the economy in June, just as cases were beginning to decrease.

Most experts agree this does not represent a second wave of infections. Rather, what we're seeing now is a second crest of the first wave, which had never completely ebbed away.

More worrying is the situation in some European countries. After having reduced case numbers to near zero, many are phasing out social distancing measures. In some countries such as Austria or the Balkans states, cases are now on the rise again, with curves eerily similar to those of early March.

The same is true for some Asian countries such as South Korea. Whether these rising cases will trigger a fully-fledged second virus wave remains to be seen.

What Is The Likely Economic Impact of a Second Wave?

The economic impact of a second coronavirus wave largely depends on two factors: how severe it is, and how governments and banks respond to it. 

The severity of a second outbreak will be determined by how responsibly people behave once official social distancing measures are relaxed. In this respect, red flags are up across the board: Quarantine and social distancing fatigue are taking over.

In part, that severity will also depend on how swiftly and willingly governments reimpose social distancing and lockdown measures.

Experience has shown that the first outbreak was handled better economically by countries that responded early and strictly. New Zealand, which put thorough measures in place immediately after their first cases, has successfully reopened the country and is seeing an economic recovery.

In no small part, the economic damage caused by a second wave will depend on stimulus measures put in place by governments and federal banks. Exemplary for this is the stock market dip in response to Federal Reserve Chair Jerome Powell voicing reservations about the post-corona economic recovery in June.

Markets in Peril, Markets that Stand to Gain

Overall, if a second wave of the pandemic hits and similar measures to combat it are implemented once more, the markets set to suffer and markets set to gain are the same as during the first wave.

Transportation and energy stocks are set to lose, alongside the stocks of companies providing consumer discretionary goods. When the economic climate is rough, and people's budget tight, these goods are quickly discounted.

Sportswear brand Nike NKE suffered from this combination of factors, in addition to people being confined indoors. Consequently, its stock slipped 6.3% on June 26, as it disclosed quarterly losses and announced job cuts.

On the other hand, a number of stocks that soared during the first wave are again set to gain.

Consumer staples, delivery, and tech companies, as well as health care stocks all saw increases in the thick of the COVID-19 outbreak: Walmart WMT went up 27% from March 12 to April 16, though it has since been lowering. FedEx FDX is now up 15% from its March 16 low, Amazon AMZN gained 63% in the same period.

Health care supplier Thermo Fisher Scientific TMO has gained nearly 42% since March 23, and pharmaceuticals company Eli Lilly LLY is up around 38% in the same period.

Other natural winners are companies facilitating remote work - a trend predating the pandemic, but strongly accelerated by it. Wall Street darling Zoom Video Communications ZM tripled its stock value since late February, and team messaging provider Slack WORK doubled it since early March.

There are also the background cloud services that remote work ultimately relies on: Companies such as cloud communications provider Twilio TWLO (whose stock value has tripled since early March), or content delivery network Fastly FSLY (which gained 220% even over its pre-pandemic February high).

Corona-Ready Business Life

There is some consolation in case a second wave does hit. Most enterprises now have structures in place to deal with coronavirus-induced restrictions to business.

In March, many companies had to master an abrupt digital transition to remote teams, and to business life online. It took time for entrepreneurs to find the right tools and set up the right infrastructure to adapt their business and their teams to the new challenges.

This know-how and the necessary infrastructure are now largely in place. In the event of a second wave, these resources merely have to be reactivated.

Similarly, many employees suddenly working from home offices initially faced struggles with productivity and the novel remote work tools. And while many are probably glad to be able to return to their offices, most now have the skills to deal with a work from home situation.

Overall, while investors are right to harbor second-wave fears, many companies are much better equipped today to deal with the challenges posed by a lockdown economy.

The Bottom Line

Current developments and projections show a second pandemic wave is clearly possible, and so is another hit to the economy. There are too many unknowns for experts to agree on an exact probability or impact.

That said, the first signs of a possible resurgence can currently be seen in countries that had seemingly vanquished the virus.

The definitive economic response to a second wave depends on its severity and the response of governments and banks.

One thing is very different now from what it was in February: Businesses, governments and banks now have battle-tested experience, and people have the strategies and tools necessary to deal with remote work.

Despite the economic fallout of a possible second wave, with an eye to the right trends both during it (health care, tech, essential retail) and regardless of it (remote work), investors can still spread their risks and count on probable winners.