Stocks Are Already Responding To Post-Covid Pent-Up Demand. What You Need to Know.

The narrative that Covid-19 vaccine inoculations will enable reopenings and a normalised economy has begun to play out. And while stocks have been down of late, the decline is actually a positive signal about the economy.

The hope has been that, as the roll-out of vaccines goes on, government restrictions will be lifted, and small businesses will rehire workers. The question mark, in addition to whether vaccinations will stop the pandemic, has been whether the economy will be healthy enough to bounce back.

After all, shops can only rehire if they have the cash, and consumers—many of whom are out of work—can only spend if they have money. Yet the trillions of dollars the government continues to spend to support the economy, including jobless benefits and direct stimulus checks, have provided a major boon for household cash savings.

The groundwork has been laid, it seems, for the demand the economy suddenly lost during the pandemic to come back just as fast.

At the same time, daily inoculations in America through January were many times higher than in December. The pace has remained brisk, with more than 65 million doses administered so far, according to the Centers for Disease Control and Prevention. States have indeed been reopening.

Economic data shows the improvement.

The unemployment rate is 6.3%, down from close to 15% at the depth of the pandemic and down 0.4 percentage point in January. Jobs are coming back, even if the labor-market recovery is uneven at times. Household incomes rose 10% in January from December.

As people grow more confident about their job prospects and safety, they are spending some of the cash they have accumulated. Retail sales rose more than 5% month over month in January. Companies are anticipating strong demand: Orders for durable goods rose more than 3% for January, more than triple the amount economists expected.

In short, reopenings are working for the economy and consumers are already unleashing pent-up demand. Economists expect gross domestic product to increase in the mid-single digits in percentage terms for 2021, a gain that would bring economic activity back to near the 2019 level. Economists at RBC Capital Markets wrote in a recent note that 9% growth for the year is conceivable.

On the surface, the stock market hasn’t seemed to reflect optimism. The S&P 500 is down more than 3% since Feb. 12. That is when interest rates begin their most recent pop higher, which makes the risk of owning stocks less attractive.

But growth stocks—a haven for investors during much of last year’s market turmoil—have been leading the decline. Those stocks are more sensitive to changes in rates and they are less influenced by economic growth than value stocks are.

The rising rates reflect changes that benefit value stocks: increasing expectations for inflation and better demand for goods and services. The Vanguard S&P 500 Value Index exchange-traded fund (VOOV) is flat since Feb. 12.

The strong economic trends are young. The most important factor now is how effective vaccines will be against new virus strains.

Note: Usual Northern Sea Route shown for illustrative purposes Source: Sea Legend Daniel Kiss/WSJ

Shipping cargo through an Arctic shortcut never made economic sense—until now.

Climate change and war in the Middle East are flipping the math that previously kept ships plying longer routes from Asia to Europe. A Chinese company on Saturday is starting the first regular cargo service to Europe through Arctic waters, seeking to reap the benefits of quicker travel time and less fuel use.

The shipper Sea Legend will dispatch the Dubai Tower from Ningbo, China, to Felixstowe in the U.K. on what it calls the Arctic Express, following a route along Russia’s north coast. The voyage by the vessel, which is capable of carrying 1,740 20-foot containers, is the biggest commercial step in the Arctic since a Maersk containership first completed the route in 2018.

Global warming is a big factor behind the new route, but it is not the only one. Nearly half the Arctic region’s summer ice—an area four times the size of Texas—has melted over five decades, clearing a fairly reliable path in the summer months. Meanwhile, high oil prices and attacks by Houthi rebels in the Red Sea have made the traditional routes costlier and more dangerous.

Members of China's 16th Arctic Ocean scientific expedition team take selfies on the ice surface. — Members of a Chinese scientific expedition team on surface ice in the Arctic Ocean this week. Wen Jinghua/Xinhua/ZUMA Press

Beyond that, Beijing has ambitions to play a role in the Arctic’s future, lending a geopolitical dimension to the Chinese company’s shipping route.

Last year Sea Legend completed a trial run from Asia to Europe in a record 20 days. That is roughly half the time of a voyage via Africa’s Cape of Good Hope that many carriers now take because of the Red Sea uncertainty.

Fuel accounts for 70% or more of the costs while at sea, said Alan Murphy, a former Maersk analyst who runs research firm Sea-Intelligence.

Saving fuel by shortening the journey doesn’t automatically make a route profitable. Insurance premiums for the Arctic are 40% higher than the Cape of Good Hope route, said Jonathan Steenberg, an economist at credit insurer Coface. Sea Legend’s Arctic vessels are relatively small. And even after warming, an icebreaker is still sometimes needed to help the cargo ship.

But if the ship can go without an icebreaker, Coface said the Arctic route is now cheaper than a Cape of Good Hope voyage in some circumstances. It estimated that at current oil prices of around $90, the cost of shipping liquid bulk such as liquefied natural gas could drop roughly 33% compared with the Cape of Good Hope route, while dry bulk goods such as cereals would cost about 8% less.

The container ship Istanbul Bridge being unloaded by large blue and red cranes at the port of Gdansk. — A containership operated by Sea Legend in the port of Gdansk, Poland. jackowski/epa/Shutterstock

The route is only passable in the summer and fall. Sea Legend plans eight voyages between August and late October, before conditions get too icy.

“It’s not the Suez Canal but it’s a significant number for the Arctic. It shows there is potential,” said Malte Humpert, founder of the U.S.-based Arctic Institute and author of a book on Chinese shipping in the Arctic.

Even in summer, ships have to navigate around dangerous ice floes and deal with rapidly changing weather. By the end of the shipping season in October, the sky is dark most of the time.

A Russian tanker suffered serious damage to its hull while sailing along the Arctic route despite being assisted by an icebreaker, its insurer, AlfaStrakhovanie, said Thursday, adding that it paid out roughly $650,000.

Coface estimates 3.5% of trade among East Asia, Europe and North America will be able to use Arctic routes within the next five years, representing $64 billion in goods.

Last summer, a record 23 cargo ships transited the Northern Sea Route, which hugs Russia’s north coast. That is tiny compared with the Suez Canal, where more than 30 ships transited daily.

Western companies that want to follow in Sea Legend’s path have to navigate treacherous politics. Russia claims sovereignty over the entire Northern Sea Route and permits for ship traffic are issued by its state-controlled nuclear operator, Rosatom.

Aerial view of a port with many cargo ships, red cranes, and rows of stacked shipping containers. — The Dubai Tower’s route will begin in the Chinese port of Ningbo. Huang Zongzhi/ZUMA Press

“Western companies are in a tricky position,” said Humpert of the Arctic Institute. “At what point do they jump back in the water? When does it become economically necessary, and how do you weigh that against environmental risks and the political dimension?”

An alternative Arctic route, the Northwest Passage that connects the Atlantic and Pacific oceans via the Canadian Arctic, is less passable because it is dominated by narrow waterways where ice gets bunched up. The highest number of cargo ships completing the passage in a year was 13, in 2023.

China has declared itself a near-Arctic state despite not having access to Arctic waters. It depends on Russia’s goodwill to use the Northern Sea Route.

“Beijing is concerned that if they don’t establish a significant strategic presence in the Arctic now, it’s going to be more difficult in the future,” said Marc Lanteigne, expert in polar geopolitics at the Arctic University of Norway in Tromsø. However, he said, “China needs to be careful not to give the impression that they are trying to challenge the strategic order in the Arctic.”

Sea Legend didn’t respond to requests for comment.

Any polar venture contributes to China’s quest to master Arctic travel. The country also has three icebreakers and a support vessel currently on a monthslong scientific expedition north of Greenland. Scientific and commercial voyages can yield data about natural resources awaiting below melting ice caps and information for positioning nuclear-armed submarines.

Stocks Are Already Responding To Post-Covid Pent-Up Demand. What You Need to Know.

The path to economic recovery is starting to clear.

China is launching the first regular Arctic cargo route to Europe, offering faster journeys and lower fuel costs as melting ice and Red Sea risks reshape global shipping.