Stocks continued to rise on Friday. Leadership this time was in the risk-on stocks, those most affected by Covid-19, as hopes for improved medical treatments sparked the rally.
While any news of better treatments is good news, the number of new cases continues to spike. The skew toward younger Americans and more effective treatments has kept hospitalization rates in check in most areas. The death rate continues to be well below spring peaks. But in hot spot areas, hospital capacity is filling up. Even in states that one might least expect a strong response, like Louisiana, Governors are now either strongly recommending or mandating the use of masks. While we are a long way from quarantining once again, some states are now closing bars and the use of indoor seating in restaurants.
One doesn’t need a governor to tell you to change behavior when the news all around you is about escalating virus spread. Airline bookings have begun to flatten once again, and cancellations are rising. Office parking lots remain largely empty, even as businesses reopen. Retail sales have begun to drift lower even as more stores open. That doesn’t mean anyone is returning to isolation.
One difference is apparent. Those parts of the nation that suffered the most trauma in March and April seem to take the threat of another spike more seriously. Walk the streets of New York and almost everyone wears a mask. To be sure, restaurants are offering outdoor seating and stores are reopening. But they aren’t packed. Subway travel is way down. Cabs are hardly visible. Contrast that with Florida, Georgia or the Carolinas. Those are today’s hot spots. But more disease doesn’t mean a lot of deaths. The young are getting the disease, but few are dying. People generally don’t wear masks, except where mandated by law or employer. You don’t see a lot of seniors eating in restaurants, but millennials on down will pack bars if left to their own judgment.
The net result is that headlines are scary, but the economy continues to recover slowly. The stock market has responded to the latter, as it should. But that doesn’t mean a slowdown in the pace of recovery should be ignored. If the spike in the virus continues to rise, it will inevitably spill over into the economy. There isn’t a governor in this country who wants to mandate anything that will prevent citizens from doing what they want to do. But if modest targeted steps prevent future calamity, it is the right call. That is why you see a lot of Southern-tier governors taking some steps and promoting the use of masks in public places.
This brings us to the newest controversy, the reopening of schools. You hear both sides and I have nothing to add. There are many constituencies: kids, teachers, parents who work, etc. and all have different requirements and fears. Clearly, reopening schools while caseloads are rising is far from optimal. The reopening process is hampered in most markets by a lack of effective testing and tracing. Back in the spring, President Trump heralded the imminent moment when the US could effectively test 5 million Americans per day with results back within 48 hours. We are at 500,000 tests per day, and in hot spot areas results often take a week or more, making results almost worthless from a containment point of view. Everyone knows crowds, especially indoors, will create spikes. There isn’t an easy solution. But a solution that doesn’t allow kids to go to school five days a week is one that will have clear economic impact. Undoubtedly, there will be many variants of school reopening ahead. Some will simply reopen with a few precautions like temperature checks and masks. At the other extreme, there may be a few that opt for 100% virtual. There will be a few months of adjustment and then we will learn the reality. So far, the stock market seems to be concluding that education life can return to a normality that can accommodate a gradual recovery in economic life. We’ll see.
I went back to look at the front page of the New York Times for February 20. Why that date? It was the high of the market. The headline that morning was about the poor performance of Michael Bloomberg in the previous night’s debate. Elizabeth Warren chewed him apart. The other lead story was about the disembarkment of passengers from the Diamond Princess cruise ship in Japan. Americans were flown home. Those showing evidence of Covid-19 or who tested positive were sent to quarantine. Over 600 people on the ship tested positive. Two died. There were no articles on the front page about the disease in this country. Within just a few days, all that would change. A month later, the market was down 30%, and we were all panicked.
Today we are much more aware, and know a lot more about the virus. But there is a lot we don’t know. We don’t know how schools will reopen effectively. Congress has another response to make as PPP funding evaporates and $600 supplemental unemployment payments run out at the end this month. Reopening schools with proper precautions will take money, money states and local governments don’t have. And our testing and tracing capabilities are woefully short.
Operation Warp Speed may be accelerating the development of a vaccine, but it doesn’t spend a dime on testing and tracing. Countries that are successfully containing the spread of the virus, and there are many around the world, have much better testing and tracing in place. There seems to be no serious effort in place to do much to solve that problem, suggesting that Covid-19 could be a serious problem for longer than we would like. I have no idea, psychologically, what is going to turn the market’s momentum, if anything. For now, the Fed has stopped net purchases of assets. Its balance sheet has flattened since early June. But if the economy stalls, it will likely resume. Don’t fight the Fed.
On the other hand, there is a battle between the reality of slowing recovery and the momentum driven psychological fear of being left out. With cash earning nothing and bonds yielding next to nothing, as stocks keep rising, it sucks in new money seeking some sort of positive return. But we all know that when stock markets change direction, they often do so with a vengeance and without much warning.
With zero interest rates in place, normal valuation measures don’t work. Stocks could well move higher. But to do so, the economic recovery must continue. It isn’t going to reopen in full for some time. Concerts, crowded football stadiums, and full airplanes or cruise ships are not in anyone’s near term crystal ball. They don’t need to be for markets to move higher. But a spike in Covid-19 that impacts the economy will spark a correction. Back-to-school has to work, which means it has to work economically. Stores have to continue to reopen. Outdoor dining works fine for now, but it won’t work in December, at least not in the northern half of the country. Markets can accept some setbacks but not a lot.
Today, Cheech Marin is 74. He was great in “Tin Cup”. Harrison Ford is 78. Patrick Stewart is 80. I wonder if Captain Picard ever met Han Solo.
James M. Meyer, CFA 610-260-2220