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This piece is cut and pasted from an investment update from Legal & General Investment Management today (18/05/2020):

  The role of politics in a potential second wave
Media and investor attention has been drawn to the experience of the so-called ‘early easers’ of lockdowns, and so far the news has been quite good. There have been some localised outbreaks, but no material evidence yet of full-force second waves of COVID-19 emerging in countries like Austria, Korea and Germany.

That said, those countries all had manageable caseloads when paring back their restrictions – unlike the US, where active cases per capita are running around five times higher than they were in the early-easing countries at the time they began to unlock. Some American states that are relaxing stay-at-home guidance run serious risks of a secondary outbreak, especially with no contact tracing in place.

Looking deeper into the US, we see further evidence that the country should not be treated as one when it comes to the virus’s spread. Hospitalisation rates, which acted as a good leading indicator in Italy, are coming down in New York and New Jersey. But in much of the rest of the country, they are both high and consistent, implying those states have not passed their COVID-19 peaks even as they start to unlock.

Interestingly, the level of mobility in each state – an indicator of how serious lockdown measures are – is highly correlated with Trump’s vote share in the 2016 election, with the most Republican states the least locked down. Conversely, lockdown levels and hospitalisation rates show no relationship whatsoever, so it is politics, not epidemiology, that’s dictating the US approach to the restrictions.

What does unlocking mean for markets? The initial reaction may be positive as it means economic activity returns, but we believe such optimism is overdone. Unlocking will be slow and individuals will be reluctant to return to their previous lifestyles any time soon. To that extent, ending restrictions not only poses a risk of a second virus wave, but a market risk, too, as investors are disappointed by the slow speed of economic recovery.

J P Morgan also flagged up the management (or lack of it) of coronavirus in the USA as a potential issue/significant risk in their market update last Wednesday afternoon.

Steve Speed

18/05/2020