Keynesian epidemiology

UBS House View - August 2020

Dallas Federal Reserve Bank President Robert Kaplan probably never thought he would achieve international fame for his views on the economics of covering your mouth. Yet when Kaplan said that wearing face masks was “the most important thing we can do right now” to hasten the economic recovery, it reverberated around the world. Like investors, the Federal Reserve has one eye on stimulus measures to support the economy, and another on virus transmission rates. To paraphrase Milton Friedman, “We are all Keynesian epidemiologists now.”

Since last month’s letter, the Nasdaq is up 6.1% and hit a new high, the S&P 500 has gained 3.6%, China’s CSI 300 has gone up 11.7%, and global stocks have risen 4.2%. Market confidence has increased despite the spike in virus case counts in the American South, and some governments choosing to return to stricter social distancing measures. 

In this letter, I discuss why we believe global equities can continue to be supported in the second half of the year. We think countries won’t lock down again because of a “second wave.” Furthermore, a combination of pent-up demand, government stimulus, and negative real interest rates should provide further upside for stocks in the months ahead. I also provide our latest thinking on positioning ahead of the US election, how to filter out some of the short-term noise, and our key investment.

UBS House View

Our publication "UBS House View" gives you a compact overview of UBS's opinions on the financial markets. Drawing on our global investment and research capabilities, it aims to offer you the best, most up-to-date investment guidance.