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COVID-19: Will the Second Wave Crash the Stock Market?

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The COVID-19 pandemic has had a massive effect on global markets in 2020. Countries that saw large COVID-19 outbreaks had their equity markets decline precipitously around the same time the pandemic reached their shores. Eventually, the contagion hit all equity markets, as lockdowns and travel bans dented international trade.

Since then, global markets have recovered much of their losses. Some, such as the NASDAQ, have even rocketed forward to all-time highs. However, it would be a mistake to say that markets are entirely in the clear. The ever present threat of a second wave is a risk factor that investors remain worried about.

Just recently, U.S. states like Texas and California brought back old lockdown measures after cases spiked within their borders. If such developments became more widespread, then global markets could crash once again.

Economic recovery put on hold

The reason why COVID-19 has had such a big impact on the stock market is that it has affected economic fundamentals. When businesses are forced to close, they can’t earn revenue. That negatively impacts their stock prices.

Further, the people who work at the closed companies lose income. Part of their earnings may be replaced by government benefits, but the CERB doesn’t even replace full-time minimum wage earnings in some provinces. So, with massive numbers of people out of work, consumer spending takes a hit.

In recent months, businesses have been opening thanks to reduced lockdown measures. As a result, consumer spending has increased. However, a second wave of COVID-19 would put all of that in jeopardy. If a big enough outbreak of COVID-19 were to materialize, new lockdown measures would likely be introduced, and businesses would likely close as a result. Once again, earnings would take a hit, just like they did in Q1 and Q2.

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Some sectors would be hit harder than others

That said, a second wave of COVID-19 would not affect all stocks equally. As we saw in the initial outbreak, sectors like travel, banking and energy were hit harder than others. It would likely be the same a second time around.

The effects would probably be most strongly felt by airlines. If you look at an airline like Air Canada (TSX:AC), it has been hit by COVID-19 in more ways than one. First, it’s been forced to cut routes to areas that aren’t accepting international flights. Second, it has had to cut other routes that are technically allowed, but for which customer demand is weak.

Third, its near-shutdown of operations has forced it to borrow and dilute equity. Finally, it’s expecting long-term pain, as wary customers are expected to avoid travel even after the pandemic is over.

It goes without saying that all this is bad news for Air Canada. It’s also bad news for the broader economy. All sectors of the economy are interconnected, and airlines are a vital industry whose results impact many others (e.g., energy and hotels). If a second wave of COVID-19 puts the brakes on Air Canada’s business, expect the broader markets to take a hit.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned.

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