You have to hand it to this market. It finds a way to go up.

Eight days ago, it looked like the fastest rally ever recorded had met its Waterloo in a rout that knocked US$2 trillion off the price of equities in a matter of hours. But rather than retreat, bulls retrenched. Instead of hitting sell on everything, they quietly migrated back to the stocks that propelled the gains through April and May, while laying off the value shares that drove early-June’s euphoria.

The result is an advance that continues to defy a chorus of bearish voices. But before bulls celebrate, the stay-at-home contour of the latest leg amid worsening coronavirus news should give reason for pause. A slowdown in the pace of reopening, or even a return to some form of lockdown, would hamper the nascent economic recovery. Retail and institutional investors alike say the flareup is their biggest concern, with excitement over a recovery warping into angst over stalling momentum.

“There is some element of worry this is going to be with us for quite a bit longer and be quite a bit more damaging,” said Matt Forester, chief investment officer of BNY Mellon’s Lockwood Advisors. “It’s been very clear the markets are rewarding certain sectors that they see as having benefits from this event. That doesn’t seem to be stopping.”

Embedded Image

For now, whatever gets thrown at this market, it finds a way to rise. When the coast is clear, it’s airlines, cruise lines, and small caps that lead the charge. When the view is cloudy, megacap technology, home-improvement stores and video-conferencing developers take the helm. Fueled by the stay-at-home cohort, the S&P 500 rose 1.9 per cent in the five days, a gain so sizable it would have been the fourth-biggest in the six months leading up to the February peak.

An equal-weight gauge of stocks that includes Zoom Video Communications Inc., Lowe’s Companies Inc., and General Mills Inc. rose more than four per cent in the week, data compiled by Bloomberg show. An index including airlines, hotel operators and cruise lines slumped 5.5 per cent.

In one view, the changing of the guard is healthy, a broadening in participation of sorts. Another says stocks are confused, and the latest leadership questions the path of the recovery on which much of the rally is predicated. Take Friday, when news that Apple Inc. would re-close some retail stores sent a shiver through the market.

That headline was the latest example of how the spreading coronavirus is testing investors’ nerves. Reports detailed a new outbreak in Beijing. In the U.S., data show cases rising in states including Arizona, Florida and Texas, where hospital admissions rose in a record streak.

That’s fueled demand for the the megacap safety trade, where investors pile into cash-rich companies with rock-solid balance sheets. The Nasdaq 100 rose 3.6 per cent for its best week in over a month. That helped push a relative price ratio of the Nasdaq versus the S&P 500 to a record.

Embedded Image

According to Jefferies’ Aneta Markowska, areas of the country seeing higher case counts are already seeing economic activity lose momentum. The firm’s chief financial economist separated states into baskets based on COVID-19 spread and found that visits to retail and recreation outlets have flat-lined where virus spikes occurred while activity is still rising in other parts of the country.

“The likelihood of new lockdowns remains extremely low, but a new wave of infections could certainly alter consumer behavior and reduce spending,” Markowska wrote in a Wednesday report.

Due to worries over a second virus wave, Christopher Wood, global head of equity strategy at Jefferies, recently neutralized his stance on cyclical shares after holding a positive view. He’s not alone with his laser-focus on the spread.

Roughly half of respondents in the latest Bank of America Corp. fund manager survey labeled a second wave as the top risk facing markets, the most of any concern. Strategists at Morgan Stanley issued a survey this week to 2,000 U.S. consumers to gauge the impact of the virus on behavior. Among those asked, virus spread was the top concern with 67 per cent labelling it as so, up six percentage points from the beginning of June.

Embedded Image

Ann Miletti, head of active equity at Wells Fargo Asset Management, worries any virus spread could deter confidence and spill into the labor market, therefore hindering the recovery. The latest reading of initial jobless claims came in weaker than forecast, with 1.5 million more people filing for unemployment insurance.

“If you start to see spikes, and people were going out, then you start to see a pullback in spend,” Miletti said. “Will that hamper employment as well? Those things play into one another. I do worry a little bit about that. Have we plateaued?”

To be sure, not everyone fears further spread of the virus will topple the rally, especially with a Federal Reserve put in play. As Bloomberg Intelligence strategists including Gina Martin Adams put it: A “second wave is unlikely to create a double dip for equities.” In their view, technical indicators were simply stretched, and a pause was inevitable.

“A resurgence is unlikely to drive stocks down to the lows of just three months ago,” the BI strategists wrote. “Federal support has likely steered the economy away from a worst-case scenario and policymakers retain significant firepower to ward off future concerns.”