Thursday, June 11, 2020

Impact of US Protests on the Financial Markets

NBHM Research Team

How the Inequality that Fuelled Fiery Protests in the US Might Affect the Markets

 

It’s an important protest, fuelled by gross injustice. Unfortunately, it comes at a bad time for the US economy. How will it impact the markets?

Financial markets react negatively in times of political and civil unrest. Combine that with a global pandemic, soaring unemployment and the world’s economies inching towards recession, and you could well have a recipe for disaster. The year 2020 has been considered by many as the most traumatic for the US since 1968.

A shocking video of George Floyd, a 46-year-old African American, being killed by a Minneapolis police officer was just the spark needed for the Black Lives Matter movement. The video which went viral on social media in just minutes sparked a series of violent protests and demonstrations against police brutality in a number of US states.

Shops were burnt and protesters were beaten or tear-gassed in many cities. The National Guard was deployed in the US capital, along with 15 other states, and curfews were imposed in many regions. The protests have also spread across Europe and Australia, with even the Canadian Prime Minister, Justin Trudeau, going on one knee to show his support.

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Markets Not Impacted by the Protests… Yet

The stock markets have remained unfazed by these happenings. Equity markets worldwide have been soaring since the beginning of June 2020, fuelled by investor optimism associated with the gradual reopening of economies.

On June 9, 2020, the S&P 500 and the Dow Jones Industrial Average (DJIA) gained record highs for the second straight session. Since plunging to dangerously low levels over 2 months ago, the S&P 500 is now trading 40% higher. Crude oil prices also settled at a 3-month high of $36.90/barrel. The Nasdaq Composite was also up 10.6% YTD, closing 0.79% higher on June 9, 2020, on its sixth straight positive day.

All reports indicate that investors are paying more attention to the economic data than the widespread protests. On June 6, 2020, the US Department of Labour released surprisingly positive figures, with 2.5 million job additions in May 2020. This was the biggest monthly increase the country has seen for some time now, bringing its unemployment rate down to 13.3%. ISM released its manufacturing activity index (PMI) on June 8, 2020, at 43.1%. The figure has increased for the first time since January, reviving hopes of a quick economic recovery.

The markets might not be paying attention to these protests, thinking that it wouldn’t impact the economy or company earnings. However, many analysts remain fearful of escalating riots across the country.

 

What Might Happen if the Protests Escalate?

 

1. Businesses Will Fail to Reopen Amidst Curfews

Protesters have already targeted retailers such as Walmart, Target, Nordstrom and Macy’s by looting shops. Storefronts across many cities, including Minneapolis, Atlanta, New York, Chicago and Los Angeles have been destroyed. This has driven many retailers to put a halt to plans of reopening their businesses after the lockdown. Companies like Apple and Walmart are now working on reduced store hours.

The escalating protests can hurt corporate activities, already reeling under many months of economic inactivity. Unemployed people will suffer more, when they are unable to get back to work soon. Sooner or later, lower earnings will impact stocks and the overall markets.

 

2. A Second Wave of COVID-19 Infections Could Occur

As of June 10, 2020, the US is the country with the highest number of COVID-19 infections, with over 1.9 million cases and deaths surpassing 112K. Thousands of protesters that have been gathering without following any social distancing protocols could spark a rise in the infection rate.

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A full-scale return of aggressive transmission would bring all economic activity to a halt once again. In February 2020, the US officially ended its longest period of economic expansion of 128 months, and fell into deep recession, according to the National Bureau of Economic Research. In Q1 2020, US GDP declined 4.8%. The World Bank estimates that the US economy will contract 6.1% in 2020.

Infection cases and mass protests have led to US Treasury Yields breaking lower. This has resulted in some downward pressure on the US Dollar. The US Federal Reserve has so far been unable to provide any longer-term guidance in this unprecedented environment. This is also an election year for the country, which is an added pressure on investor sentiment.

The markets are soaring right now, on hopes of a quick revival of the US economy. Considering that it is the biggest economy in the world, if it plunges any deeper into a downturn, the consequences could be grim for the global economy.

 

3. Consumer Sentiment Could be Hit

Social unrest can impact consumer confidence, a significant driver of stock market performance. Consumer confidence declined sharply in March and April 2020, improving slightly in May 2020. The current unemployment rate of 13.3% is still high, in terms of historical standards. Further curfews and lack of any political intervention might be bad for small businesses and spending activities.

 

History Says Otherwise

Civil and political instability is not new to the US. However, history shows that the markets have always been unaffected by such crises. Whether it was President Kennedy’s assassination in 1963, the civil rights march in Selma in 1965, the 1968 assassination of Dr. Martin Luther King and Robert Kennedy or the protests in 1992 following the police beating of Rodney King. In all these situations, the S&P 500 posted annual gains of between 5% and 20%. The S&P 500 also rallied after the August 2014 riots in Missouri. Not only in the US, but in London too, the FTSE 350 soared after the 2011 protests and riots, following the police killing of a black man in North London.

However, none of these riots happened amidst a deadly pandemic, which has already taken more than 411K lives globally, as of June 10, 2020. Political uncertainty is also set to return soon, with the US Presidential elections around the corner. The current US President is good for the stock markets, but his dealings with China and his handlings of the COVID-19 crisis do not seem to be market positive. A weak US response to China and a deteriorating domestic environment could be bad for the financial markets.​

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