The year is still not half over. The history of Covid-19, and how it should best be combated, will not be written for a long while yet. So far, 2020 has already seen prognostications that the pandemic could mean the end of Xi Jinping and the communist regime in China, and that socialized or nationalized health care had been shown to fail definitively during the disaster that afflicted northern Italy in the late winter. I say all this as a preface to what will unavoidably be yet another newsletter devoted almost entirely to the coronavirus. At this point in the pandemic’s progress, it is the US and its economic and political model that appears to have failed. Has it? And what will be the economic and financial consequences? Back in March, President Donald Trump made a big deal of blocking entry to the US by people of the European Union, on the basis of the bloc’s poor record in dealing with the coronavirus. The ban remains in effect. From next month, in what must occasion great schadenfreude in the capitals of Europe, it will probably be the other way around. Meanwhile, the effect of the American failure to stop the virus is beginning to be felt in real-time economic activity. Could that yet have an impact on markets? It is certainly possible. US stock markets have far outperformed their counterparts in the EU for more than a decade. Given the US success in producing the companies that now provide the dominant platforms for the internet, and its ability to bolster its banking system far more effectively than the EU could do, this should not be surprising. For the last few years, any brief incursion in the FTSE-Eurofirst 300’s relative performance to the S&P 500 above its 200-day moving average has been met with a renewed dose of weakness for European stocks. To be clear, there is no direct link between the pandemic and the performance of stock markets, in either relative or absolute terms. There are too many other variables in play (starting with the money being deployed by central banks). For one very strange example of how global risk aversion and liquidity swamped any specific issues of the coronavirus, look at how Brazil’s stock market tanked relative to the rest of the world when it still accounted for a negligible proportion of global Covid cases, and then recovered even as Brazil started to become one of the most serious global hot spots, accounting now for almost 14% of global confirmed cases. But there are signs that anxiety about the spread of the virus through the American Sun Belt is putting US equities under pressure again. If we look at how airlines, hotels and cruises — the sectors most obviously affected by the virus — have performed relative to the rest of the market, we can see concern that reopening was not going according to plan start to set in after an initial peak of enthusiasm three weeks ago. There has also been an anxious reluctance for the market as a whole to respond to the obvious pickup in cases. There are justifications for this, as the rise in cases is partly due to wider testing, and the death rate is significantly lower than it was. But as the following chart produced by Capital Economics Ltd. shows, the way the US stock market has looked through rising Covid-19 cases in the US over the last month has been very strange. As it stands, the latest fall for the S&P 500 brought it just below its 200-day moving average, which also happens to be almost exactly at the level of 3,000. The last time the market faced this dual landmark, stocks went higher again. After a weekend of unremittingly negative and scary headlines from across the Sun Belt, it will be very interesting to see if this can happen again. Whatever happens in absolute terms, it is hard to see how the US market can keep performing so much better than its European counterpart, when Europe has shown that the ability to do what the US cannot, and bring the virus under control. It is no longer possible to doubt that we have a worrying problem on our hands. As the death rate is reducing, and many of the cases now being reported are among younger people less likely to be severely affected, the good news is that it is still possible to avoid a full repeat of the scenes seen earlier in Wuhan, Milan and New York City. However, the failure of policy and leadership in Arizona, a once reliably red state that produced Republican presidential candidates Barry Goldwater and John McCain, appears total. Meanwhile Arizona also has a Senate election this year, where the Republican Senator Martha McSally will be defending her seat. Predictit bettors seem to think that she is as good as defeated already. The Predictit market’s wagering on the presidency is more guarded, but the chances of a Democratic victory are now put at almost two in three, the strongest they have been. Given the amount of change in the last four months, it is plenty possible that there will be as much change in the next four months. For the time being, the president is in a political hole. What effect should this have on the markets? It will be negative. Stocks are currently doing somewhat worse than they normally do in a year when the incumbent goes down to defeat. Causation works in both directions: A poorly performing stock market suggests that the president will have a harder time selling his party to the electorate, while political problems for the incumbent mean extra uncertainty, which markets dislike. At present, with the S&P 500 threatening to drop below 3,000 and its 200-day moving average again, the short-term political risks appear to be to the downside. Bloomberg