^{Source: Schroders, June 2020. UK is included in Europe}

The political temperature rises and the US election looms

By and large, Western governments enjoyed far greater public support than they might have expected in dealing with the pandemic. It was perhaps inevitable that as the acute phase of the health crisis passed, division and conflict would return to public life.

In the UK, this was apparent in the widespread outrage at Dominic Cummings’ questionable travels across England as he “tested” his eyesight. Elsewhere hundreds of thousands of people have taken to the streets around the world to protest racial inequality and police brutality, following the killing of George Floyd.

So far, stock markets have shrugged off these protests, as they have so much distressing news this year.

This, however, is an election year in the US and the impact of the unrest is far from clear. Taking a tough line on protesters may help President Trump establish himself as the “president of law and order”. But by contrast, the protests and Trump’s response may galvanise support for Joe Biden. One outcome that would come as a surprise to markets is a Democrat victory in both the presidential and senate races. This would allow Biden to deliver on his campaign pledge to reverse Trump’s tax cuts, which provided a significant boost to company profits and household spending.

Electoral calculations are likely also influencing the US response to China’s imposition of security legislation on Hong Kong, with the Trump administration initially taking a hard line. While its position has since softened, the risk of renewed trade tensions between the US and China is high. Needless to say, this would not help the global recovery from a pandemic.

Towards a new normal

History suggests that pandemics can leave longer-lasting scars on an economy. Growth suffers as consumers and businesses become more inclined to save than spend or invest. Interest rates remain at very low levels as central banks attempt to stimulate demand. My colleague Keith Wade explores these and other long-term investment implications of Covid-19 in an excellent article here.

In recent months, markets have shown an impressive ability to shrug off shockingly weak economic data relating to the period of lockdowns. We expect they will pay closer attention to indicators that shed light on how quickly confidence is recovering. They may be less forgiving if it becomes apparent that economic activity is not rebounding as quickly as they currently expect.

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