Certain sectors of the US economy – particularly retail, hospitality, and entertainment – have incurred significant damages and will likely continue to languish. As some companies in these sectors fight to stay alive, ingenuity and adaptation will remain the order of the day. Elsewhere, we continue to see signs that the economy is moving into what could be a more durable recovery. This is particularly true in less labor-intensive sectors and those less affected by social distancing measures – sectors like financial services, manufacturing, government, and health services – which make up a greater combined share of total gross output in the US.
This Is Still the First Wave
It is important to note that the widely publicized case increases in Arizona, Texas, and Florida are not reflective of a “second wave” but instead the “first wave” taking place in areas that hadn’t yet dealt with considerable outbreaks. While this may seem nuanced, it is a meaningful distinction and the response to such increases provides no insight into what a true “second wave” would look like or what the policy response would be. This is not to downplay the spread of COVID-19 in these areas, but rather to highlight the concentrated nature of the outbreaks.
Furthermore, increasing case counts in the South and Southwest belie significant progress made in early hot spots on the east coast. And more importantly to markets, states that have seen a recent increase in positive test rates – suggestive of increasing cases that are not the result of increased testing efforts – only represent about 10% of US GDP. A handful of states do not represent the entire country. What’s more, there is evidence as of early August that case growth is beginning to moderate in recent hot spot states.
Global Commitments Are Enormous
Even if investors have been hearing this message often, it bears repeating: Fiscal support at the aggregate global level has been historic. In the US, it has succeeded in providing a bridge for locked-down workers and consumers, and many have seen a year-over-year increase in personal income as a result. The combination of cash payments, unemployment benefits, and the Paycheck Protection Program has helped sustain US median household income during a period of national crisis. In fact, retail sales (ex-gas stations) through April are back in line with prior year trends. This story is still unfolding, and additional aid dollars to state and local governments will be necessary in order to maintain forward momentum from March’s full stop.
Of equal importance is Europe’s commitment relative to fiscal policy in the face of COVID-19. After much debate, the 27 member states of the European Union agreed to establish a €750 billion Next Generation EU fund to assist the region’s pandemic recovery. Belgium, France, and the United Kingdom (not an EU member) have announced policy commitments worth approximately 30% of their GDP, while Italy and Germany have pledged aid guarantees worth nearly 50% of their GDP.
As of early August, approximately 151,000 deaths have occurred in the US as a result of COVID-19. This is without question a national tragedy. Yet, remaining mindful of pandemic victims and their families is as important as recognizing that American healthcare professionals continue to prove they can handle the outbreak. Nurses, doctors, administrators, paramedics and frontline workers of all kinds have saved thousands of lives and helped to prove that COVID-19’s fatality rate is lower than was initially feared. They deserve our appreciation and thanks – and have helped us learn a lot in the months following the initial outbreak.
Furthermore, there are signals that once cavalier attitudes about the seriousness of the disease are changing and that hand-washing, social distancing, and mask-wearing are being generally accepted as “the new normal.” President Trump’s support of face masks in public remarks – and his decision to wear one himself more frequently in public – will help support efforts to flatten the curve nationwide. As of July 22, 32 states have a mask mandate in place, up from 22 on July 2. In contrast to the early months of the pandemic, there is now bipartisan recognition that large public gatherings are conducive to COVID-19 contagion and should be avoided.
Lastly, global efforts at finding a vaccine continue. There are approximately 150 vaccines in development as of July 28, with 31 vaccines in human trials – including 2 in late-stage trials. These efforts constitute reason for optimism, with the caveat that fresh challenges related to mass production and distribution will face any drug that’s first to cross the finish line. While some in-trial vaccines are already being mass produced, manufacturing and delivering a single medicine at a global scale will be a formidable logistical task.
Maintaining Risk Mindfulness
While the situation remains fluid, we believe as of late summer that unless we see things turn more dire – including an increase in COVID-19’s lethality or evidence of a renewed strain on healthcare systems – a measured nationwide reopening will continue through the end of the year and into 2021. The experiences of early 2020 have the potential to help address and contain a significant second wave of cases in regions that have endured “hot spot” status, allowing for a gradual reopening and the establishment of a new way of life.
The stock market is not the economy. Large index players appear to be virtually unaffected by COVID-19, and they are likely large enough to play a role in holding up the broader market. More importantly, strength has rotated from large tech firms and other immediate beneficiaries of the “new normal” economy to include more cyclically sensitive sectors, an important signal that the recovery in asset prices is indeed sustainable. In addition, the number of the COVID-19 business closures could be contained in part by merger and acquisition activity in a world where distressed managers are looking to sell. Market risks that we are continuing to watch include:
- Political partisanship around federal aid dollars for state and local governments.
As of early August, Congress is continuing to debate the shape and scope of an additional fiscal relief package for the general public, but how the federal government might alleviate pandemic-related budget shortfalls among state and local governments remains an open question. We estimate they will need some $550 billion to be made whole – and they have received no support thus far. State and local governments will need assistance in order for a sustained US economic recovery to continue. As the November 2020 election approaches, debates over aid dollars will likely remain contentious.
- An unexpected and significant increase in fatality rates.
As discussed above, there is evidence that healthcare systems can handle large numbers of COVID-19 cases in terms of treatment. Nonetheless, evidence of increasing virus lethality has the potential to reverse hard-fought gains.
- Consumers and business retrench.
The COVID-19 experience is unparalleled in a modern economy – nobody can say for sure how consumer spending might look coming out the other end of the crisis, or know in advance exactly how the allocation of capital on the part of businesses might change. Debates about data collection aside, a relatively improved employment picture since March is cause for optimism, and the slow but steady improvement in high frequency mobility and consumer spending data continues to point toward an economy on the path to recovery.
- The liquidity backdrop tightens.
While it’s impossible to say exactly how or why this might happen, that it occurred at the beginning of the crisis served as a surprise for many. The Fed remains on high alert and is in “whatever it takes” mode to prevent a credit crunch from happening. The Fed’s actions have proven successful, and that’s commendable. In fact, we believe markets and investors may be continuing to underestimate the historic size and magnitude of the fiscal and monetary response to the COVID-19 pandemic worldwide.
Plenty of unknowns remain, as do a multitude of risks. COVID-19 has drastically changed life as we know it. Still, much work has been done to answer the call, and this work continues. Regardless of whether or not you take a bull or bear perspective on the remainder of 2020, our guess is you’re doing so with a bit more humility and gratitude.
This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary. The views and opinions expressed are as of July 31, 2020, and may change based on market and other conditions.
CFA® and Chartered Financial Analyst® are registered trademarks owned by the CFA Institute.
All investing involves risk, including risk of loss.
Natixis Distribution, L.P. is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by affiliates of Natixis Investment Managers.