The Second Wave Is Here: 3 Things Investors Need to Know

All year health experts have been warning that in the winter, as people went indoors and lower humidity made the virus more contagious, that a second wave of the pandemic was not just possible but likely.

In the last two weeks, daily global cases have risen by 18% as many countries that thought they had the virus contained are now battling with a strong resurgence.

Given that this pandemic has already caused a 34% market plunge, with lockdowns triggering the fastest bear market in history, it's understandable that investors might be nervous about the second wave that appears to have arrived, just as experts predicted it would. So here are the three most important things you need to know about the second wave, and what it likely means for your portfolio in the coming weeks and months.

The Institute for Health Metrics & Evaluation, or IHME, expects that this second wave to peak around the end of the year, in terms of new infections.

(Source: IHME)

Deaths generally peak two to three weeks after new cases, and globally the second wave is expected to kill between 1.6 and 4.7 million by February 1st.

(Source: IHME)

Globally IHME is expecting deaths to hit 2.4 million within a few months, representing 1.3 million deaths over the next four months. For context, it's taken this pandemic 10 months to kill just over 1 million people. Now, these are some grisly forecasts, but there is both good and bad news for anyone concerned with saving lives...as well as their portfolios.

If the prospect of 2,400 US daily deaths by the end of the year is saddening, there is good and bad news about the IHME model.

(Source: IHME)

IHME's model assumes that about 20 states will lockdown as some European cities are now doing (such as Paris). NYC is also attempting to shut all non-essential businesses in the Bronx and Queens to control surging viral cases. IHME's model specifically estimates that by February 1st US mobility will fall to 46% below the pre-recessionary baseline, not much higher than the -52% we hit in April. How the heck can there be good news in this? Doesn't this model predict another economic catastrophe that is likely to see hundreds of thousands of Americans dead and leave the stock market in ruins? Yes and no, as with most things in line, there are critical nuances to understand that will determine whether or not the US falls into a depression and the stock market back into a terrifying bear market.

There is a major difference between the lockdowns that occurred in March and April and those that states are considering today. Back then Congress was willing to act with almost unbelievable bi-partisan speed to pass the CARES act and pump record amounts of stimulus into the economy. Today we have hyper-partisan gridlock and the stimulus bill has been languishing in Congressional purgatory for months. You only have to look to the battle between NY's governor and the mayor of NYC to see what I mean. Governor Cuomo is preventing Mayor Diblasio from locking down Queens and the Bronx, despite the alarming rise in cases.

Whether or not we SHOULD lockdown again, to prevent our ICUs from becoming overwhelmed as they were in April, and whether we WILL lockdown again, as the IHME model assumes, are two very different things. Now, this has some important implications for the economy and investors.

• without more lockdowns the death toll and second wave may be worse than IHME is currently projecting (and they are forecasting some pretty awful numbers)
• whether or not states or cities lockdown officially, consumers may just choose to stay home, as most did in the early days of the pandemic, thus hurting the economy and threatening a double-dip recession
• US corporate earnings expectations, which have been rising slowly but steadily for months, could begin to reverse and start falling

The major economic and earnings recovery that the blue-chip economist consensus and Wall Street analysts have been forecasting is the primary fundamental catalyst for the record-setting rally we've seen off March lows. However, the good news for investors, and Americans in general, is that even if we get a double-dip recession, and a second bear market, JPMorgan expects both to be far milder than what we witnessed earlier this year.

(Source: JPMorgan Asset Management) 

JPMorgan, most economists, and most US CEOs estimate the probability of a double-dip recession from a second wave at just 20% to 25%. And even if we get one, it's not likely to be a 31% GDP crash like in Q2, but a modest 1% to 2% GDP dip. And the bear market that JPMorgan expects from such a low probability event would be a far milder 22% peak decline, not a 34% one month crash like in March. Why is JPMorgan, Goldman, UBS, Moody's, and the overall blue-chip economist consensus so seemingly optimistic when IHME is assuming we'll need a near April like lockdown? For two main reasons.

First, a vaccine is expected to be approved by late 2020/early 2021 and the CDC estimates that by mid-2021 every American who wants a vaccine will be vaccinated. While a vaccine isn't guaranteed to end the pandemic entirely right away, it will likely significantly slow the spread of the virus, since by mid-2021 the CDC estimates that 50% of Americans will be immune to it. The second reason for economists being so optimistic is more stimulus.

UBS is now assuming a Democratic wave in its base case forecast, Moody's estimates $1.5 trillion in stimulus by early 2021, and Goldman's base-case forecast is a $2 trillion stimulus deal. The House recently passed a $2.2 trillion stimulus bill, most likely to get the specifics nailed down precisely so that if the Democrats take control of the White House and Congress they can pass that large stimulus package in March and Americans will be seeing critical pandemic relief cash by April.

Moody's estimates that if we get $1.5 trillion in stimulus early next year, GDP growth will still be 3.5% even with a second wave. JPMorgan and UBS recently wrote in notes to clients that as long as we get a stimulus bill by Q1 2021, the US is likely to completely avoid a double-dip recession. Without a double-dip recession, the market pullback may become a correction but it's unlikely to become a bear market. In other words, just because the second wave is here, doesn't mean that the economy or stock market is doomed.

Market timing is the worst possible thing investors can do and has killed more retirement dreams than anything other than insufficient savings. How can you protect yourself from a potential correction or even another bear market?

• 4 Blue Chips To Sleep Well At Night In These Uncertain Times

In this article, I not only point out four wonderful high-yield and low volatility blue-chips retirees can trust in these troubled times, but I show how to turn them into an Ultra-SWAN pandemic proof retirement portfolio.

(Source: JPMorgan Asset Management)

(Source: JPMorgan Asset Management)

That includes using various forms of asset allocation that, if conservative enough can result in extremely low volatility, no matter what the economy or stock market is doing. How low? How about a peak decline of just 9.2% during the Great Recession, the 2nd worst stock market crash in US history? How about a 7.8% peak decline in the March pandemic bear market? How about a 3% peak decline JPMorgan expects in future mild recessions? Heck, JPMorgan even expects my Ultra-SWAN Pandemic proof portfolio to fall just 3.4% during a recessionary bear market that might be caused by this second wave! That's about 7X a smaller decline than JPMorgan expects from the S&P 500 in such a scenario.

The bottom line is that if you have your fundamentals right, you literally don't have to worry about the election, pandemic, economy, or anything else that might be coming in the next few months. I literally never lose sleep over any of the short-term risks that whip Wall Street into so many short-term frenzies, because I live, and invest my life savings, by the Dividend Kings motto of quality first, and prudent valuation & risk management always.

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SPY shares were trading at $343.01 per share on Wednesday afternoon, down $0.37 (-0.11%). Year-to-date, SPY has gained 8.10%, versus a % rise in the benchmark S&P 500 index during the same period.

Adam has spent years as a writer for The Motley Fool, Simply Safe Dividends, Seeking Alpha, and Dividend Sensei. His goal is to help people learn how to harness the power of dividend growth investing. Learn more about Adam’s background, along with links to his most recent articles.

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