October 2, 2020

Covid-19: Tracking the Recovery – October 2, 2020

At the outset of the COVID-19 outbreak in February, we endeavored to provide you with a periodic and cohesive update across three main aspects of the pandemic. First, we wanted to provide a quick summary of where and to what extent the pandemic was spreading. Second, we sought to provide updates concerning policies being enacted and implemented at the state level concerning re-opening activities. Finally, we endeavored to relay the impact related to re-opening activities on aggregate economic activity and investors’ reactions as measured by stock market indices.

So many of the elements related to COVID-19 have changed over the months and we were happy to keep you apprised of them. However, we are now at a point in the evolution of the virus where we believe our regular period economic and market updates are sufficient formats for us to communicate information. This includes our Weekly Market summary and our (now monthly) Investment Spotlight newsletter. As such, this will be the final special COVID-19 piece unless circumstances change dramatically.

We would like to start this update with a brief summary of the state of infection, mortality and infection rates here in the U.S. When this Coronavirus first emerged in March and April, the Northeast was hit particularly hard as cases were growing by roughly 30-37k per day. This period also corresponds with the peak in mortality as daily deaths were generally ranging between 2,000 and 2,700 per day. New cases troughed in mid-June which coincided with a decline in the mortality rate with most days registering well below 1,000 deaths per day. New cases spiked higher through mid-June and July, with cases registering above 70k /day for a two-week period. This time, the virus emerged in several states across the south, mid-west and western U.S. Fortunately, the mortality rate remained well below the early peak, coming in at marginally above or below 1,000/day over the time period. Cases then fell through early September as did the mortality rate. Over the past few weeks, we have seen an uptick in cases, though the mortality rate has held steady and by a measure of 7-day moving average has declined modestly.

As we mentioned in prior writings, at the Federal level, we do not believe a shut-down will happen again. This belief led us to track re-opening activities on a state-by-state basis to gauge the potential track of the economic recovery. This proved to be a daunting task. While the Federal Government put forth a 4-step re-opening framework, each state created their own customized version, some with more steps, some with sub-steps, some with less. Each state also set their own parameters by which they would move to subsequent steps and often made special exceptions along the way. States have also taken differing approaches to re-opening schools, which will likely evolve as infection data emerges. Given where we currently are, it is our opinion many states will not move to a significantly less restrictive or fully re-opened status until a viable vaccine is produced and made available to the general public. More on this later.

When the Federal Government shut down the economy in mid-March to slow the spread of COVID-19, everyone knew the economic impact would be devastating. In retrospect, we now know that Q1 GDP came in a -5.0% annualized while Q2 suffered the full brunt of the shutdown and declined by -31.4% annualized, kicking off an official recession. Unemployment during this time period spiked from 4.4% in March to 14.7% in April. Meanwhile, the government passed the CARES Act to mitigate the economic impacts on workers and business owners. These funds were designed to create an “economic bridge” to a point in the future where the economy could emerge from the unprecedented shutdown. After falling precipitously during February and March, markets have strongly rallied on the hopes of economic recovery, additional government funding and news of potential vaccine breakthroughs that would be well in advance of early estimates.
Optimism abounds for a strong Q3-2020 GDP rebound with the likes of Goldman Sachs calling for a 35% increase on the back of strong consumer spending. Some industries such as travel, and tourism continue to struggle mightily. However, spending has reemerged strongly in other areas such as retail and home services/supplies. Whether or not such spending can continue is likely predicated on two factors.
The first is the recovery in employment. Friday morning, the Bureau of Labor Statistics reported the September unemployment rate declined to 7.9%. While this is a dramatic improvement from the month of April, it remains significantly higher than the pre-pandemic 4.4% rate. This leads to the second factor which is another stimulus bill. Congress and the White House have been sparring over the past several weeks concerning a second stimulus bill that would continue to provide for support for those remaining out of the workforce. Clearly, another round of stimulus would be supportive of continued consumer spending. As always, the devil is in the details, how much stimulus, how much employment support, what industries may receive additional funding and how much, what other items may be tacked onto the bill that have nothing to do with economic stimulus at all?

Finally, as was mentioned earlier in this writing, ultimately, if you believe individual states are awaiting a vaccine to fully re-emerge, what is happening there? While the decline in the mortality rate may be a function of several factors, including advancements in treatments and therapeutics, only a vaccine coupled with these advancements in treatment will soothe political nerves enough to move forward with re-opening. Presently, there are three companies with vaccines in the final phase of regulatory approval. They include: Moderna, Pfizer and Astrazeneca. Johnson & Johnson has a vaccine not far behind. If any prove to be successful, and we should have some data over the next several weeks, getting FDA approval will likely be fast-tracked. Then comes production and distribution. On this front, companies are currently working with the Federal Government, ramping up production capabilities across the pharmaceutical industry while also putting distribution plans in place to expedite distribution once produced. When will a vaccine be broadly available? Nobody can be sure. What we believe is that a process and infrastructure has been implemented and assembled to make the realistic answer to that question “as quickly as possible”.

As always, we will continue to monitor the facts and circumstances of this situation and other relevant data to ensure we are doing our very best to manage your financial affairs through this unprecedented time period.