Likely to see a second wave of stock selling instead of a second wave of COVID-19 cases: strategist

Before there is any form of “second wave” of COVID-19 globally, the stock market may first experience a second wave of selling as it once again prices in worse-case scenarios for economies and companies.

“We think you’re more likely to see a second wave down from markets as opposed to a second wave up in COVID-19 — we have concerns here,” said FBB Capital Partners director of research on Yahoo Finance’s The First Trade. Bailey pulls no punches on how bad a second wave down in markets could be — the benchmark being the 35% downdraft from the late February highs to the March 23 lows for the S&P 500.

Continued Bailey, “I don’t know if it will be as bad as the first wave [of selling]. It could be half that bad. You take a look at valuations for the S&P 500 now and we’re back to dot com bust levels. I think we have a reasonable downside over the next weeks or months here.”

To be sure, the market has started the week equally concerned about a second wave of COVID-19 and still overheated valuations.

Over the weekend, four states — California, Florida, Texas and Arizona —were responsible for more than 16,500 new COVID-10 cases, points out Deutsche Bank researchers. That represented about 37% of the total new cases in the U.S. Deutsche Bank notes the seven-day average of COVID-19 cases has risen 4.5% in the past week in Arizona, up from 4.1% in the prior week. Florida cases advanced by 2.3% over its seven-day average, up from 1.8% the previous week.   

Social media was ablaze this past weekend with photos of people not wearing masks or practicing social distancing, only fueling Wall Street’s renewed fears.

“So I think it’s the new normal [spikes in infections] if this is how we continue to act,” said Dr. Dara Kass, Yahoo News medical contributor and Columbia University associate professor of emergency medicine, on The First Trade.

Meantime, there were fresh concerns about the virus amid a small outbreak at a market in China.

‘Still a lot of uncertainty in this market’

The Dow Jones Industrial Average came out of the gate on Monday down more than 600 points. By early afternoon trading, the blue chip index was down about 100 points. Elsewhere selling pressure persisted for V-shape economic recovery trades such as United Airlines. On the other hand, stay-at-home names such as Zoom, Peloton and iRobot surged perhaps on concerns a second wave of infections means slower pace of re-openings for states.

People wearing protective face masks pass the New York Stock Exchange, Tuesday, May 26, 2020, as employees arrive for the partial reopening of the trading floor. (AP Photo/Mark Lennihan)

Still fresh on the minds of investors is June 11, where the Dow crashed more than 1,800 points as overcooked investor expectations met with several doses of less than cheery news.

The small-cap Russell 2000 Index of mostly U.S. centric companies fell 8% on the week, worse than the 5% drop on the S&P 500.

“More broadly, market fundamentals have improved a lot since March, so we think fears of Thursday’s selloff igniting a March-like decline are not realistic. But there’s still a lot of uncertainty in this market, and we would not be surprised if the pullback that started last week is 10%-15% in its entirety,” said Sevens Report Research founder Tom Essaye.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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