Europe’s mutated coronavirus doesn’t yet pose an existential threat to the market narrative that has become a reasonable consensus since late March, and particularly since the news of the efficacy of vaccines in November.
Global equities and oil prices slumped while safe-bond prices jumped Monday, as investors reacted to the new strain of Covid-19 that has emerged in the U.K., prompting immediate restrictions against travel from the country.
But the downbeat mood may not last. Short-term disruptions and often dreadful public health outcomes in parts of the world have been largely overlooked by financial markets on the core understanding that extraordinary government and central-bank support would be available to prevent mass unemployment and loss of income, and to ward off huge waves of default.
With that in place, investors have been content to look ahead to earnings at least a year out. The U.S. Treasury yield curve in particular has steepened, indicating that the miserable economic conditions of 2020 are considered less and less likely to drag on.
That willingness to look ahead, rather than the irrational exuberance that characterizes stock-market bubbles, has been the most important driver of extreme valuations this year. The S&P 500’s price-to-earnings ratio sits at almost 27 times, looking at profits over the past year, but only 19 times earnings expected two years from now. That gap is historically large for a good reason.
European travel and retail stocks bore the brunt of Monday’s selloff. But even after a double-digit fall, shares in
International Consolidated Airlines Group,
the parent company of British Airways, are only back to where they were a little over a month ago. In the grand scheme of things, the difference between being down 72% and 78% for the year is marginal: They are two different flavors of collapse.
Lockdown-sensitive sectors aside, the public-health impact and disruptions to travel and supply chains will come second to the central question for investors: Will the mutation make any difference to the longer-term impact of the virus?
Right now, scientists say that is unlikely. There is no evidence of increased severity of symptoms or higher fatality rates from the new strain, while researchers and public-health officials have expressed confidence that the change in the strain shouldn’t affect the efficacy of the vaccines available.
As long as science continues to support that consensus belief, the economic outlook one or more years out is unlikely to change much, limiting the extent of the market fallout. Only downgrades to those longer-term projections, which depend on the high efficacy of vaccines already being deployed in many places around the world, could seriously derail markets right now.
Write to Mike Bird at [email protected]
Corrections & Amplifications
Safe-bond prices rose as yields fell Monday. An earlier version of this article incorrectly said safe-bond yields rose. (Corrected on Dec. 21)
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