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Are Financial Markets None the Wiser?

Obviously, a disaster scenario in which COVID-19 vaccine trials fail and the pandemic spins out of control would expose the ongoing equity rally as a case of irrational exuberance. But the worst-case scenario isn't necessarily the most likely, and the bears have not adequately considered the possibility of permanent positive changes.

LONDON – In an April commentary about the wild gyrations in financial markets during the February-March phase of the COVID-19 pandemic, I noted that the behavior of equity markets had been as bewildering, complex, and fascinating as ever. Still, I suspected that a weird logic was at work, and argued that markets might continue to rally despite the collapse of the world economy. And so they have. Will that change?

In my 40 years of observing and participating in financial markets, I have learned that August is always a month to watch. It is the harbinger of the fall, and for whatever reason, that season has featured some of the most tumultuous moments in financial history, from the Wall Street crashes of 1929 and 1987 to the 1997 Asian financial crisis, the 1998 Russian default, and, of course, the collapse of Lehman Brothers in 2008.

There are plenty of reasons to think that the late summer and fall of 2020 will match or exceed the chaos of these previous episodes. For example, imagine if COVID-19 infection rates across Europe were to start spiking again, as they have in the United States and other pandemic hotspots around world. That would trigger renewed lockdowns and place even more pressure on those working toward a vaccine. But what if the phase-three trials for all of the most promising vaccine candidates were to fail?