Key takeaways

  • “Pandemic fatigue” has led to a rise in spending in categories such as traveling, dining out and entertaining.

  • The virus continues to have an impact on China’s economy, real estate, oil and the labor market.

While the COVID-19 virus remains a steady health concern three years after it became a global pandemic, its impact on the economy is changing. “Pandemic fatigue” is currently seeing consumers exhausted with behavior modifications, with many wishing for a return to pre-pandemic life—and spending.

“Infections are generally down from peak levels, but the mix of the economy has changed,” says Rob Haworth, senior investment strategy director for U.S. Bank.

According to the Bureau of Economic Analysis, consumer spending on goods was up 1.1% in Q4 2022 over the previous quarter, while spending on services increased by 2.6%. One category that saw a surge in revenue was leisure, such as traveling, dining out and entertainment.

Haworth says people are choosing to buy experiences over things. “We've just come out of a period of pent-up demand for travel,” he says. “In 2022, we saw airlines reporting very good earnings. We’ll have to see if this mix continues because people bought enough stuff in the pandemic or if everything will smooth out and normalize.”

 

The COVID vaccine’s role in returning to normal

Newer variants like Omicron are testing the vaccine’s effectiveness, but it continues to play a key role in our ability to return to “normal.” According to the Centers for Disease Control and Prevention, fewer people in the U.S. died from the coronavirus in 2022 than in 2021. In fact, deaths decreased by nearly half.

Still, the U.S. has not achieved what would be considered a level of immunization that could ultimately defeat the virus. A large group of Americans are hesitant to receive the vaccine or are ardently opposed to it. What’s more, vaccine mandates by governments and private businesses ended following successful court challenges that fought against the mandates. Immunity on a societal scale remains elusive.

Omicron and more recent variants also seem to have greater potential for “breakthrough” cases among vaccinated individuals than previous variants. The FDA authorized an updated bivalent booster that protects against the original virus that causes COVID-19 and the Omicron variant in August 2022. However, the percentage of people who are up to date on the booster is low.

COVID-19 full vaccination levels in the U.S.

Source: Centers for Disease Control and Prevention, data as of Jan. 26, 2023.

Age group

% fully vaccinated (primary series completed)

% w/updated (bivalent) booster dose

Total U.S. population

69.2%

15.5%

Population 5+ years

73.2%

16.5%

Population 12+ years

77.3%

17.7%

Population 18+ years

78.9%

18.8%

Population 65+

94.2%

40.1%

Age group

Total U.S. population

% fully vaccinated (primary series completed)

69.2%

% w/updated (bivalent) booster dose

15.5%

Age group

Population 5+ years

% fully vaccinated (primary series completed)

73.2%

% w/updated (bivalent) booster dose

16.5%

Age group

Population 12+ years

% fully vaccinated (primary series completed)

77.3%

% w/updated (bivalent) booster dose

17.7%

Age group

Population 18+ years

% fully vaccinated (primary series completed)

78.9%

% w/updated (bivalent) booster dose

18.8%

Age group

Population 65+

% fully vaccinated (primary series completed)

94.2%

% w/updated (bivalent) booster dose

40.1%

Source: Centers for Disease Control and Prevention, data as of Jan. 26, 2023.

 

COVID’s evolving impact on financial markets

And what of COVID’s effect on financial markets and the broader economy? Economic expectations since the start of the pandemic have been a two-horizon scenario.

The first horizon, which has been in place since the middle of 2020, represents reopening activity around the globe as society adjusts to life with COVID-19 as a lingering concern.

The second horizon is when the markets achieve a “steady state” that more closely resembles conditions in pre-pandemic times. Investors may be anxious to see the economy reach that second horizon, but while U.S. and European economies have shown signs of recovery, China is still experiencing the pandemic’s global economic impact, says Haworth.

“China is more like the U.S. was in 2021,” he says. “It’s researching some form of mRNA vaccine, which could help manage infection risks as they reopen, and that's probably the biggest story as we look at 2023 in terms of the change in economic growth.”

Haworth predicts China will experience pent-up demand in travel and goods. “Their lockdowns have been more severe,” he says. “Their citizens have been kept away from being able to go out and travel and other things.”

However, China’s economic growth will likely be slow. The country experienced GDP growth of just 2.9% in the fourth quarter of 2022, which is low by historical measures.1 Fourth-quarter growth for China in 2020, for example, was 6.5%.1

 

Financial market trends since COVID

While the stock market enjoyed a solid recovery in 2021 as most of the world started to reopen, optimism started to slide in 2022 due to inflation, the war in Ukraine, U.S. political tensions and the global impact of China’s pandemic response. Wall Street experienced its worst year since 2008’s Great Recession.1 The S&P 500 index fell 19.4%, and the Down Jones Industrial Average fell 8.9%. Tech stocks were some of the worst performers, down between 22% and 66%.2

COVID’s impact on the stock market in 2023, however, is much less severe than earlier in the pandemic, says Haworth. “The market is paying much less attention to the ebb and flow of infections,” he says. “The market is trying to anticipate what will happen next in China as they reopen, while the rest of the world is closer to normal—perhaps a next normal.”

“[China] is doing some form of mRNA vaccine, which could help it get back to reopening, and that's probably the biggest story as we look at 2023 in terms of the change in economic growth.”

Rob Haworth, senior investment strategy director, U.S. Bank

With uncertainty still in play, Haworth says today’s short-term risks aren’t new or different than traditional market risks. “Are companies’ earnings growing faster or slower? Is our economy growing or risking a recession? Is inflation slowing or not?” he asks. “The Federal Reserve remains an important factor.”

The Federal Reserve has been raising interest rates to help curb inflation, making it more expensive to borrow money to buy anything from real estate to auto loans. Fed chairman Jerome Powell has made clear that the Fed will continue to raise rates in 2023. While markets have shown an ability to recover over time, Haworth cautions that investors shouldn’t expect a sudden “all-clear” sign that risks have subsided. He says a big question mark is the Fed’s terminal rate, which is the peak fed funds target rate set by the Fed for the current cycle.

“The market is pricing in something around 5% [it stood at a 4.25% to 4.5% range in January 2022], but the Fed is projecting something higher,” says Haworth. “That could make things more difficult for equity investors in the near term and raise the risk of a recession.”

 

COVID’s lasting impact on areas beyond financial markets

As the world continues to adapt to an ever-evolving “next normal,” some of the changes caused by the pandemic will be lasting.

  1. Transit and real estate. New consumer and worker tastes and demands are affecting portfolios and real estate planning. “There are big open questions about the demand for office space and the best uses of core downtown urban environments,” says Haworth. “A large development in Seattle that was originally planning to have 50% residential and 50% office space recently changed its plan to be 100% residential. We’re paying attention to what is the mix in our real estate investment portfolios and how prices will reset.”
  2. The labor market. Companies currently have 1.9 job openings per unemployed worker,3 where we would usually see fewer openings than there are unemployed people. “Maybe it’s a residual effect from COVID, but some people just don't want to go back to work and they're choosing alternate methodologies, such as retiring early,” says Haworth. “The tight labor market is something that has not been resolved.”
  3. Oil. “We have run down about half the Strategic Petroleum Reserve,” says Haworth. “If you look at total oil inventories in the US, we're basically at 2010 or 2011 levels. We're less dependent on imports than we used to be, but we're not using less oil. That's another issue that's going to take time to resolve.”

 

COVID-fueled supply chain issues are waning

A bright spot on the pandemic’s second horizon is the supply chain. Issues that plagued the U.S. in 2020 and 2021 are mostly resolved. “We're not seeing lines of ships off the Port of Long Beach,” says Haworth. “We are seeing auto production return to normal, although we aren't yet seeing auto sales return to normal.” Longer-term fixes are also in the works, such as nearshoring that brings production lines of key materials like computer chips closer.

Right now, there are more questions than answers about the long-term impact of COVID-19 on financial markets. However, preparing for financial market shifts and emerging trends can help investors prepare for an uncertain economic future.

Get more insight into the latest market news and activity.

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  1. Energy Information Administration, “Crude Oil Prices: West Texas Intermediate (WTI) – Cushing, Oklahoma.”

  2. U.S. Energy Information Administration, “Short Term Energy Outlook,” Petroleum and Other Liquids Consumption, January 2024.

  3. U.S. Bureau of Labor Statistics, “Producer Price Index News Release summary, March 2024,” April 11, 2024.

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