As regional lockdowns loom in light of a renewed spike in coronavirus cases, the near-term outlook may be a bit bumpy, says Gene Podkaminer, Head of Research at Franklin Templeton Investment Solutions. He explores the potential market implications of renewed lockdowns and comments on how vaccine availability might affect a future economic recovery.

COVID-19 fatalities have surpassed 1.5 million globally and hit a single-day high in the United States on December 3. This new wave of infections raises questions over short-term market implications.

With intensive care units (ICUs) nearing capacity in some regions, renewed lockdown orders look likely to increase. The United States and many other developed nations are struggling to slow the rate of infection, with seasonal aspects likely playing a part; many medical professionals cite a higher likelihood of the virus spreading during the winter months with increased indoor activities and holiday gatherings. We’ve also observed many citizens experiencing general compliance fatigue.

In the near term, we continue to expect a seasonal upsurge in COVID-19 cases to impact consumer behavior. Where hospitals are nearing capacity, an unwelcome return to local and regional lockdowns may still be necessary. For example, in the United States, California’s governor recently announced plans to impose stay-at-home orders on a regional basis when ICU capacity falls below 15%. We’d expect other states to follow suit with similar restrictions if and when required.

We do not know how long these measures will remain in place, or in how many countries. And it is also unclear to us how much the inevitable hit to national output, as measured by gross domestic product (GDP), will impact financial markets. But additional measures should prove a strong headwind to growth.

However, given optimism over fiscal support and an eventual victory in the fight against the virus—bolstered by ample liquidity to soothe markets in the interim—equity investors may choose to look through any near-term hit to revenues. This all contributes to an outlook that remains mixed in the near term, even as our optimism builds for the longer-term outlook.