News that President Trump and First Lady Melania Trump have tested positive for COVID-19 has helped to refocus the world’s attention on the pandemic, which continues to present economic and public health challenges worldwide. On October 2, equities were slightly rattled by the news of the president’s diagnosis, while other risk metrics appeared indifferent. Keeping in mind that the “emotional money” is in the equity market, it’s important to note that credit markets – the “smart money” – aren’t confirming any equity nervousness.

Does Trump’s diagnosis change the odds for any sort of stimulus deal? As of early October, we don’t know. What we do know is that state and local governments in the US remain desperate for help – many have started eliminating jobs to meet a balanced budget. The October 2 jobs report was also weaker than expected – another reason for Congress to consider getting a deal done sooner.

Second Wave Fears
As the northern hemisphere moves towards the winter months, fears remain high that a true COVID-19 “second wave” may begin to emerge. Indeed, it seems that Europe, which had fared well through much of the summer, is seeing rapidly deteriorating virus trends as outbreaks gain momentum in the UK, France, and Spain, in particular. Increased contagion has brought with it renewed concerns of draconian lockdown measures, though resistance to these policies remains high. Many world leaders are demonstrating a clear preference for more targeted – and less economically – damaging restrictions.

Fall Season, Rise in Cases
In the US, cases have again begun to creep higher through September, as college students return to campuses across the country. Stories of students flouting restrictions grabbed headlines early in the month. While some schools have dealt with sizeable outbreaks, many have been able to manage the new school year with success. Nonetheless, a number of states have seen cases rising, pushing the average daily case counts back north of 40,000. Importantly, positive test rates have continued to push lower as testing efforts have expanded – an encouraging trend not seen during the summer outbreaks in the Sunbelt and western states. Furthermore, as we have repeatedly stressed through the crisis, case counts reveal nothing about the severity of the outbreak and the incremental strain on the healthcare system. Unfortunately, due to changes in hospitalization reporting data, we no longer have visibility into hospital capacity numbers, though total hospitalizations have continued to remain in check despite the increase in cases. This continues to suggest the severity of the US outbreak is falling as the shift in infections to a younger demographic has led to fewer hospitalizations and reduced demand on healthcare systems.

Learned Immunity
While we may not be close to “herd immunity,” don’t underestimate the power of “learned immunity.” Where herd immunity refers to the spread of a disease slowing as more and more members of a population become immune through vaccination or prior illness, learned immunity refers to actions taken by the population to stop the spread. Relatively easy measures – including masks and social distancing – have proven immensely successful in reducing transmission. What’s more, increased understanding of the virus by medical professionals has led to a steady improvement in patient outcomes, ultimately improving recovery rates and preventing a feared increase in the case fatality rate. These learnings have been quite powerful and we believe that continued adherence to relatively easy measures will allow for a continued slow and bumpy recovery in economic activity while reducing the risk of a destructive second wave.

What about the Fiscal Cliff?
Through the summer months, many – ourselves included – cited expiring CARES Act provisions as a key risk for markets, barring an additional phase of fiscal support from Congress. As the July expiration came and went with no progress made, markets powered higher instead of selling off to force Congress’ hand. The Nasdaq1 posted its fourth strongest month since 2010 in August. In hindsight, September’s market turmoil appears to be nothing more than a reset of positioning and sentiment to work off August’s froth. With no extension of the $600 unemployment insurance booster and faint hope for another fiscal package targeting state and local governments before the election, where did this narrative go wrong?

The answer may lie in the massive of size of the original provisions of the CARES Act. As the saying goes, “Never bet against the US consumer,” and with Economic Impact Payments and unemployment boosters replacing much of the lost income for laid-off workers, goods consumption has fully recovered to pre-crisis levels and beyond. But while these income replacement measures helped to spur continued consumption, they have also led to a massive increase in personal savings. Savings rates typically spike during periods of economic uncertainty, but the nature of this crisis – which saw many Americans homebound and many restaurants and stores closed – generated an additional element of forced savings. Monthly personal savings were running at an annualized rate of $1.3T in January before spiking to $6.4T in April and have remained well above pre-crisis levels, with July savings sitting at $3.2T. While CARES Act provisions may have lapsed, US consumers still continue to save at breakneck pace, even as consumption continues to recover.

The cumulative value of the massive increase in savings over the first seven months of the year totals over $13.6T annualized. In monthly terms, that’s over $1.1T in incremental savings, which translates to $95B in incremental monthly spending power over the next 12 months. That’s a lot of dry powder to be spent or invested. To be sure, we need to see support extended, but this massive store of savings is a powerful buffer to cushion the blow of this feared fiscal cliff as progress on another package remains out of reach.

Looking Ahead to 2021
The prospect of a safe and effective COVID-19 vaccination becoming publicly available sometime in the spring or summer of 2021 remains strong. However, we would caution that the announcement of a vaccine will not equate to the immediate end of economic and public health challenges related to the virus. For one, it is expected that frontline medical workers will be the first to receive vaccine doses, followed next by high-risk populations like the elderly and immune-compromised. The logistical challenges inherent in producing and distributing a vaccine – which may require extremely cold temperatures in transit – remain significant. Hundreds of millions of vaccines will need to be administered before significant levels of herd immunity are attained worldwide. In the months ahead, investors should remain aware that the battle against COVID-19 is far from over.

COVID 19 Dashboard Chart 1 October 2020

COVID 19 Dashboard Chart 2 October 2020
1 Nasdaq is a global electronic marketplace for buying and selling securities. Nasdaq was created by the National Association of Securities Dealers (NASD) to enable investors to trade securities on a computerized, speedy and transparent system, and commenced operations on February 8, 1971.

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