The 3rd U.S. Covid Wave is Here - Look to Europe for how U.S. Economic Data Will Fare in the Weeks Ahead

Oct 23, 2020 | Nick Scholte


Europe is approximately 2 to 4 weeks ahead of the U.S. in its own resurgent wave of Covid-19. While current U.S. economic data remains robust, European PMI data has re-entered contractionary territory. Also, thoughts on the upcoming U.S. election.

To my clients:

It was a down week for North American stock markets with the Canadian TSX falling0.8% ; the U.S. Dow Jones Index falling 0.9%; and the S&P 500 falling 0.5%.

The U.S. is now officially reaching new daily case highs in what is clearly a 3rd wave of the pandemic. Unlike earlier, the distribution of cases is much more widely dispersed than in the 1st (Spring) and 2nd (Summer) wave when infections were largely concentrated in certain key regions. Dr. Scott Gottlieb, former Commissioner of the Food and Drug Administration, and a leading voice on the coronavirus pandemic suggests that the high “base” level of daily cases as we enter the colder months is very concerning and could well lead to a very dramatic spike higher in covid infections in the coming weeks. As clients well know, this has long been my thesis as well.

And this surge higher in new cases WILL have an economic impact. One need look no further than current Eurozone data to see evidence of this. For whatever reason, Europe is approximately 2 to 4 weeks ahead of the U.S. in terms of its own new wave of the pandemic and most major European countries have been setting new daily case highs for some while now. Today, PMI (Purchasing Manager Index) data was released for Europe and the U.S. While U.S. data remains robust and indicative of a continuing recovery from the depression-esque levels of March and April, Eurozone data has now broadly turned back into contractionary territory. I’d suggest a similar path might lie ahead for U.S. data over the next month. The question will be how sharp and deep the downturn? Certainly I expect nothing like earlier this year, but I do believe that equity (i.e. stock) markets will at some point need to recalibrate expectations to account for this expected turn downward. If the markets have a consequential turn lower, I still intend to use this anticipated weakness as an opportunity to bring client equity weightings up to a full-neutral or slightly greater than neutral stance. At present, positioning continues to sit just slightly below neutral.

Changing gears, to date I have steadfastly avoided commenting upon the looming US. Election in these weekly updates (although I did make mention of the topic in my recently distributed 3rd Quarter letter to discretionary clients). I’m still reluctant to make any definitive statements about the election. That said, a former RBC strategist whose un-published thoughts and commentary I still receive suggests that Biden will win. He believes there are many (myself included if I’m being honest) who are gun shy to express this view given the debacle of the 2016 election when the polls were horribly off-base in their prediction of a victory for Hillary Clinton. Further, he makes the following observations which support his call for a Biden victory and which I find interesting:

- Biden is significantly more popular than was Clinton. Biden is viewed as “favorable” (those who view him favorably less those who do not) of ~+10 whereas Clinton was consistently around -10 to -15;

- There are no viable third party candidates this election to siphon votes from Biden as was the case with Clinton in 2016

- Biden is polling above 50% nationally and in many swing states, a level Clinton never achieved (partly attributable to the lack of viable third party candidates noted above)

- There are far fewer undecided voters than there were in 2016 (and some 45 million have already voted!)

- The October Surprise – recall the release of the letter by former FBI Director James Comey in 2016 just days before the election in which he said the FBI was re-opening its investigation into Hillary Clinton’s emails. Would history really repeat on this front?

Again, I find the above interesting and, if I check way deep down in my gut, I too think Biden will win. But I reiterate – I have no confidence in this viewpoint. I should also add that pre-pandemic, despite my strong misgivings about the man, I thought Trump would win re-election.

However, more germane than any of the preceding is the fact that the U.S. economy and markets tend to do well under either Republican or Democratic administrations. To be sure, data suggests that markets do better under Democratic administrations but I am somewhat suspect of the causal link between administrations and stock market performance. My own view is that the ebb and flow of an economic cycle supercedes changes in administration and that there is a large dose of happenstance in associating market performance with which party happens to control the White House. Regardless, I know I will be glued to the television the evening of November 3rd.

That’s it for this week. All the best and stay safe,


Nick Scholte, CIM, FCSI

Vice-President & Portfolio Manager

Scholte Wealth Management
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