Stocks fell Friday, erasing almost all of Thursday’s gains. Since the late March low, stocks have been moving sideways in a rather volatile, spastic fashion reacting daily to the coronavirus events. But while the day-to-day numbers of infections and deaths continue to rise steadily, they have done so largely in line with recent forecasts. As a result, at least for now, the general motion of markets has turned sideways rather than straight down.
In political and public health circles, this week appears to be the apex in new cases across at least a large swath of the United States. Markets this morning are taking encouragement from the fact that the number of new cases and daily deaths in New York show signs of flattening.
We have all heard about efforts to flatten the curve for weeks. The semi-isolation strategies appear to be working. Flattening, however, means that instead of a bell curve with peaks that overwhelm the public health system’s ability to handle the caseload, what we face is a somewhat extended period where the number of new cases remains near current levels. The virus isn’t about to disappear any time soon.
Besides the news that the curve may be ready to flatten, markets may also be taking encouragement from comments of President Trump and others that they want to restart our economy as soon as they can. Obviously, Mr. Trump’s initial Easter Sunday goal was more aspirational than real. For now, he appears ready to push in early May to begin some sort of motion to either end our isolation or to at least ease the restrictions. How that comes about, either through Washington-motivated actions or in other ways, is clearly a big unknown at this point. European countries like Italy and Spain are a few weeks ahead of us on the curve. So far, we see no actions that we choose to emulate.
To date, the public health response has been dominant. It appears to be working. While some areas, like New York City, appear to be stressed to the limit, so far the system is holding together and functioning. Yes, a few more masks and ventilators would help. Hopefully, they are coming. But the fears of apocalyptic outcomes haven’t come to fruition.
Behavioral changes made to date, notably social distancing and heightened concern about cleanliness and hand washing, will be critical as the economy reopens. Some rules, such as limiting large gatherings, are likely to remain in place. But soon we will get to the point where public health and economic health concerns will be put on a more even footing. As a nation, we will have to accept that Covid-19 will be here for months to come and that, as a result, some will continue to get sick and some may die. The immediate public health concerns that were so critical have largely been met or will be met over the next few weeks. Now we are approaching the moment of restart.
While there are some who continue to look for a V-shaped recovery, that appears to be unlikely. Even if every business were allowed to reopen without restrictions in May, there are few who are ready to book a summer cruise. Restaurants will recover to some extent, but packed houses may have to wait a few more months or longer. Then there are the 10+ million who have been laid off. While some will be rehired almost immediately, that won’t be true for all. If a restaurant is to operate at 70% of prior levels, at least for several months, it will only rehire 70% of staff. When can baseball season start? Will stadiums fill up if it does restart?
I suspect it will take months for anything resembling pre-March normality to return. Indeed, normality may still have to wait for a vaccine, more than likely a Q1 2021 event, unless there is a breakthrough therapy in the interim. We all feel cooped up and want to get out. We want to get back to work. But we also don’t want to get sick if it’s avoidable. Thus, we don’t have to go to the movie theatre. We can avoid Broadway for several months. Plane flights will be on a necessity basis. Customer-facing businesses are going to have to spend extra money to satisfy customer concerns. Wiping down every shopping cart or spacing tables farther apart in restaurants will be costly.
Despite the new stimulus bill, the virus has pinched wallets as well. We will see how that impacts big-ticket items like car or home sales. Many, now in a pinch, have deferred key expenditures like rent or credit card bills. Those will need to be brought up to date.
Stocks are a long-term investment. For that reason, most investors are willing to look past 2020. But what about 2021. We know some businesses will be slow to recover. Recovery will certainly extend into 2021. How far is still unknown. As that question gets answered, we will have a better idea how far stocks can rebound over the next 12 months.
As we noted last week, we are now in a trading range with about 10% upside and downside, based on Friday’s close. What will cause stocks to break down below the range is either a slower and more elongated exit from isolation than now perceived, or more economic damage that extends the recession to year-end or beyond. What allows them to break out higher is a faster than expected recovery or news that a vaccine might be available before year end. Obviously, if reopening world economies stimulates a second spike in the fall requiring another period of self-isolation, that could trigger another leg down.
No one, not even the most brilliant scientist, knows for certain what path the virus takes once the self-imposed isolation ends. We know that much more effective testing is needed. Hopefully, within a month that will happen. But it too remains one of the unknowns. Over the next month or two, whatever path is taken is going to be contentious. There will be pushback from the public health side that more lives are being endangered if steps to open the economy are taken too quickly, and there will be complaints from businesses everywhere, as well as Americans with no jobs, to get started quickly. There won’t be one right answer.
Today, we simply have no clearer picture about the post-isolation path than we did last week. Markets fear that some industries may not survive without serious damage that takes years to repair, including not only leisure and travel, but also energy, banks, homebuilders, department stores and financial service companies. Stocks of these companies have been the worst performers in this bear market. All ended Friday near their 52-week lows with the exception of the oil companies hoping for a supply reduction agreement among oil producing nations. First-quarter earnings won’t offer clarity. Forward-looking statements from managements, for the most part, will be just an educated guess. We simply won’t know until later this summer who won’t survive, how fast workers get rehired, and how much damage will carry over to 2021 and beyond. As that tale unfolds, stocks will react.
Until then, the rangebound ups and downs will continue. Volatility will remain heightened, with 2% daily swings the norm, at least until we collectively have a better picture of how and when the economy can restart.
Today, Julie Ertz is 28. Paul Rudd turns 51. Billy Dee Williams is 83.
James M. Meyer, CFA 610-260-2220