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Six Beliefs for Driving Alpha in Equity Portfolios
Green Mirror - Season 1
Specialized Investment Managers, Diverse Investment ExpertiseAs the US Reopens, How Likely Is a Second COVID-19 Lockdown?
Key to understanding the strength and duration of the US economic reopening is assessing how a second wave of COVID-19 could affect hard-earned progress. That said, we believe case counts alone are not the right measure for investors to keep an eye on. At the end of the day, we continue to be most concerned about hospitalizations and fatality rates, variables which help to measure the ability of the nation’s healthcare system to sufficiently respond to any subsequent outbreak of the virus. To that end, we’ve sourced some data from the Centers for Disease Control and Prevention (CDC) to help us to monitor this dynamic.
Reading the Data
To start, hospitals generally run at relatively high levels of occupancy at baseline. In addition, elective surgeries are a big driver of hospitalizations and intensive care unit (ICU) admissions, though generally for short time periods during post-op recovery. Remember, during the peak of the pandemic most US hospitals canceled elective procedures in order to free up capacity. As a result, hospitalization rates are likely to increase as hospitals begin to once again perform these elective procedures. How much incremental capacity is taken up by COVID-19 patients will be critical to monitor.
Let’s look first at inpatient occupancy rates by state. This is the percentage of inpatient hospital beds currently occupied. The gray bar in the chart below represents the range of occupancy rates since April 1, with the purple bar representing the current level and the blue bar showing the level as of one week prior. What we’re seeing almost across the board is inpatient occupancy rates coming down. While many are still near the highs of the range, they are trending lower.
There are a few other things that stand out on this chart. In most states, hospitals have seen fairly low percentages of COVID-19 patients, typically around 5%–10% of inpatient beds. These states have been able to respond effectively to the outbreak. More heavily hit states like Louisiana, Michigan, Georgia, and Massachusetts saw rates between 20% and 30%. And the worst hot spots, New York and New Jersey, topped out around 45% of patients. New York and New Jersey saw their healthcare systems overwhelmed – and not even half of their patients were COVID-19 patients. That’s the key risk to hospitals. It’s not that every case in the hospital is a COVID-19 case and that overwhelms them. It’s the marginal stress the increase of COVID-19 patients places on these healthcare systems, keeping in mind that those hospital beds are largely occupied during normal times. A spike in cases which overwhelms hospital capacity limits the ability of those hospitals to provide sufficient care to those who need it. It also causes a ripple effect, preventing patients who require medical attention for entirely different reasons from accessing it. The result is higher fatality rates for COVID-19 patients and the potential for additional deaths from other causes as a result of insufficient access to care. This is exactly what we’re trying to avoid.
Assessing Case Counts
Increases in the number of COVID-19 cases are widely expected as human contact begins to increase with reopening. However, further economic lockdown can likely be avoided in the event of increased case counts, so long as fatality rates remain low. This is not to downplay the severity of this crisis and the national tragedy it has wrought – it is only to say that lockdowns were an emergency response meant to buy time. In hindsight, the sweeping lockdown measures enacted in the US are beginning to look like an overreaction – and that was the entire point. Overreact to control the outbreak, flatten the curve, and protect the vulnerable members of our society by preventing hospitals from being overwhelmed.
In addition, while many are drawn to the case count, it tells us nothing of the impact of the spread. Think of it this way: You get the flu, stay home from work, rest, recover, and back to normal in a few days. Well, what if you test positive for COVID-19? It’s certainly not the flu, but outside of the highest risk population, data has shown that the majority of people can successfully fight this virus without medical intervention. Many are asymptomatic, while others show symptoms and take a few days to recover while their immune system defends against the disease. While these patients are part of the case count, their effect on the greater population is arguably diminished if they’re not putting others at risk or placing any incremental strain on our healthcare systems.
Herd Immunity Considerations
To this point, if you're looking purely at case counts, more is worse. But if mortality rates remain low and contagion is spread out over a long time period, then more cases may actually lead to fewer deaths. In this scenario more cases is actually a good outcome, as it gets the broader population closer to herd immunity. To be clear, intentional social distancing severely limits the potential for growing immunity –even in the hardest hit regions – hence the importance of effective therapeutics and a vaccine.
It’s also important to remember that as testing increases, case counts increase. One is a function of the other, and challenges with testing and reporting COVID-19 in the US remain. One issue that hasn’t gotten much attention is the commingling of test results. States have been combining polymerase chain reaction (PCR) tests (designed to confirm current infections) and antibody tests (notoriously inaccurate tests designed to see if an individual may have been previously infected). The merging of PCR and antibody test data severely impacts the integrity of the numbers and reduces their usefulness even further.
Beyond Case Counts
Case counts on their own tell us nothing about the potential impact of a second wave of COVID-19. What’s more, we know that outside of the at-risk population most people can successfully fight this virus without medical intervention. What really matters is the ability of those that need care to actually access it. Without access to that care, COVID-19 is a far deadlier disease. A massive increase in cases ultimately increases the likelihood there will be more severe cases that require intensive care and thus take up hospital capacity. That overburdened healthcare system can then no longer serve virus patients effectively, nor can it serve individuals that require completely unrelated medical attention. This dynamic is what makes broad outbreaks so devastating. By contrast, lots of cases spread out over a longer time frame likely produces far fewer deaths than the same number over a very short period. As a result, hospitalizations and fatality rates make for a better measure than case counts when keeping watch on any potential second wave of COVID-19.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed may change based on market and other conditions.
Reading the Data
To start, hospitals generally run at relatively high levels of occupancy at baseline. In addition, elective surgeries are a big driver of hospitalizations and intensive care unit (ICU) admissions, though generally for short time periods during post-op recovery. Remember, during the peak of the pandemic most US hospitals canceled elective procedures in order to free up capacity. As a result, hospitalization rates are likely to increase as hospitals begin to once again perform these elective procedures. How much incremental capacity is taken up by COVID-19 patients will be critical to monitor.
Let’s look first at inpatient occupancy rates by state. This is the percentage of inpatient hospital beds currently occupied. The gray bar in the chart below represents the range of occupancy rates since April 1, with the purple bar representing the current level and the blue bar showing the level as of one week prior. What we’re seeing almost across the board is inpatient occupancy rates coming down. While many are still near the highs of the range, they are trending lower.
Inpatient Occupancy Rates
(4/1/20 – 5/26/20)
Source: cdc.gov
ICU Occupancy Rates
(4/1/20 – 5/26/20)
Source: cdc.gov
COVID Patients as Percent of Total Patients
(4/1/20 – 5/26/20)
Source: cdc.gov
There are a few other things that stand out on this chart. In most states, hospitals have seen fairly low percentages of COVID-19 patients, typically around 5%–10% of inpatient beds. These states have been able to respond effectively to the outbreak. More heavily hit states like Louisiana, Michigan, Georgia, and Massachusetts saw rates between 20% and 30%. And the worst hot spots, New York and New Jersey, topped out around 45% of patients. New York and New Jersey saw their healthcare systems overwhelmed – and not even half of their patients were COVID-19 patients. That’s the key risk to hospitals. It’s not that every case in the hospital is a COVID-19 case and that overwhelms them. It’s the marginal stress the increase of COVID-19 patients places on these healthcare systems, keeping in mind that those hospital beds are largely occupied during normal times. A spike in cases which overwhelms hospital capacity limits the ability of those hospitals to provide sufficient care to those who need it. It also causes a ripple effect, preventing patients who require medical attention for entirely different reasons from accessing it. The result is higher fatality rates for COVID-19 patients and the potential for additional deaths from other causes as a result of insufficient access to care. This is exactly what we’re trying to avoid.
Assessing Case Counts
Increases in the number of COVID-19 cases are widely expected as human contact begins to increase with reopening. However, further economic lockdown can likely be avoided in the event of increased case counts, so long as fatality rates remain low. This is not to downplay the severity of this crisis and the national tragedy it has wrought – it is only to say that lockdowns were an emergency response meant to buy time. In hindsight, the sweeping lockdown measures enacted in the US are beginning to look like an overreaction – and that was the entire point. Overreact to control the outbreak, flatten the curve, and protect the vulnerable members of our society by preventing hospitals from being overwhelmed.
In addition, while many are drawn to the case count, it tells us nothing of the impact of the spread. Think of it this way: You get the flu, stay home from work, rest, recover, and back to normal in a few days. Well, what if you test positive for COVID-19? It’s certainly not the flu, but outside of the highest risk population, data has shown that the majority of people can successfully fight this virus without medical intervention. Many are asymptomatic, while others show symptoms and take a few days to recover while their immune system defends against the disease. While these patients are part of the case count, their effect on the greater population is arguably diminished if they’re not putting others at risk or placing any incremental strain on our healthcare systems.
Herd Immunity Considerations
To this point, if you're looking purely at case counts, more is worse. But if mortality rates remain low and contagion is spread out over a long time period, then more cases may actually lead to fewer deaths. In this scenario more cases is actually a good outcome, as it gets the broader population closer to herd immunity. To be clear, intentional social distancing severely limits the potential for growing immunity –even in the hardest hit regions – hence the importance of effective therapeutics and a vaccine.
It’s also important to remember that as testing increases, case counts increase. One is a function of the other, and challenges with testing and reporting COVID-19 in the US remain. One issue that hasn’t gotten much attention is the commingling of test results. States have been combining polymerase chain reaction (PCR) tests (designed to confirm current infections) and antibody tests (notoriously inaccurate tests designed to see if an individual may have been previously infected). The merging of PCR and antibody test data severely impacts the integrity of the numbers and reduces their usefulness even further.
Beyond Case Counts
Case counts on their own tell us nothing about the potential impact of a second wave of COVID-19. What’s more, we know that outside of the at-risk population most people can successfully fight this virus without medical intervention. What really matters is the ability of those that need care to actually access it. Without access to that care, COVID-19 is a far deadlier disease. A massive increase in cases ultimately increases the likelihood there will be more severe cases that require intensive care and thus take up hospital capacity. That overburdened healthcare system can then no longer serve virus patients effectively, nor can it serve individuals that require completely unrelated medical attention. This dynamic is what makes broad outbreaks so devastating. By contrast, lots of cases spread out over a longer time frame likely produces far fewer deaths than the same number over a very short period. As a result, hospitalizations and fatality rates make for a better measure than case counts when keeping watch on any potential second wave of COVID-19.
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