Should investors worry about rising Covid-19 cases?

Covid-19 cases are on the rise in many countries, resulting in creeping concern that the economic recovery could soon be in retreat.

Using a seven-day moving average, daily new cases of Covid-19 per million people are up in France (about 181 cases), the United States (135), the United Kingdom (86) and Canada (36.5), among others, as shown in a daily monitor by National Bank Financial, Inc.

In some countries, including France and the U.S., the daily cases now surpass those in the worst week before June.

The resurgence of cases is “unnerving investors and unsettling the economic outlook,” said Douglas Porter, BMO chief economist and managing director, in weekly commentary.

The rise in cases doesn’t significantly change the fundamental economic forecast — at least not yet, he said.

That’s because more is known about how to slow the virus (such as mask-wearing and physical distancing) without resorting to broad shutdowns, and much of the economy has learned to function with restrictive measures.

Further, mortality and hospitalization rates are well below spring levels, so there’s no immediate concern that shutdowns are needed to avoid overwhelming the healthcare system, the report said.

Certainly, current deaths per million people for many countries are down significantly versus the spring.

For example, the daily new Covid-19 death count in the U.S. (seven-day moving average) is 2.3 — down from six in April and four in May, as shown in the National Bank report.

Canada’s daily new Covid-19 deaths per million average 0.2 over the last seven days — though that’s up from the 28-day moving average. Still, that figure was 2.8 in April and 3.5 in May.

For countries potentially in the early stages of an upswing in Covid-19, the U.S. experience is instructive, Porter said.

When U.S. cases rose over the summer, such measures as mask-wearing, social distancing and rollbacks of reopenings resulted in cases eventually dropping and no further major economic damage in ensuing weeks.

“From a health perspective, it may not be the best example to follow, but the U.S. experience was telling from an economic standpoint — the recovery did manage to soldier on even with a high case count, and reduced fiscal support,” he said.

Porter also noted the “entirely realistic” chance of a vaccine resulting in a better than expected economic outcome for 2021.

A risk is that fiscal and monetary policy is less well placed to support the economy in a severe second wave.

In the U.S., for example, “downside economic risks are escalating owing to the trifecta of ended or soon-ending federal income-support programs, pressure among state and local governments to balance their budgets, and the inability of Congress to pass another economic support package” ahead of the election, Porter said.

In contrast, in Canada federal spending is poised to continue as CERB is replaced by the expanded EI and other programs, he said.

Another risk is that strong sectors that managed to bounce back from the shutdowns could be hard-hit by a severe second wave.

“With virus cases rising in Canada and fiscal support fading in the U.S., the risk is now that the rebound in even the strong sectors could cool — or worse, stall,” Porter said.

He expects some moderation in economic activity in the coming months before a complete recovery takes hold. While North America will likely avoid a double dip, or W-shaped, economic recovery, “the road is about to get much bumpier,” Porter said.

In a weekly equities report, Robert Kavcic, director and senior economist at BMO, acknowledged the concern that rising Covid cases would test the earnings outlook.

The market probably sees “choppier growth ahead as targeted lockdowns loom, but not the wide-scale shutting of the economy that we saw in the spring,” Kavcic said.

As it stands, market stress across various asset classes is roughly in the middle when various crises over the last decade are compared, according to National Bank’s Canadian financial stress index.

The event garnering the highest market stress during that time was the financial crisis of 2008-09, hitting about 5.25 on the stress index. Covid-19 hasn’t quite reached 4.

For full details, read National Bank Financial’s monitor of Covid-19 cases, Porter’s commentary and Kavcic’s weekly equities report.