Stocks were mixed with a modest downside bias on Friday. As noted previously, the sharp 6%+ drop a week ago Thursday seemed to usher in a choppier environment. The euphoria evident in May and early June seems to be giving way to a more back and forth pattern. That includes rotating leadership. While some one-decision growth stocks still march higher, most aren’t doing so in a straight line. At the other end of the spectrum, the companies left for dead in the pandemic, which rallied so hard just a few weeks ago, have given back some ground.
This coordinates with the real news as most states start to reopen most activities. Southern states that reopened early are now experiencing an uptick in the number of reported virus cases. While some of the reported increase relates to increased testing activity, an increase in hospitalizations across a large number of states suggest that reopening is bringing with it a modest surge in virus activity. A few states are seeing record counts and hospitals, particularly in Arizona and parts of Texas, are filling up again.
The stock market doesn’t have a conscience. The number of ill Americans doesn’t directly impact markets. But they do react to economic consequences. So, when Apple closes 11 stores in 4 states, that matters. When Texas revokes liquor licenses for bars that violate how many can occupy their premises at the same time, that matters.
Nowhere is a massive shutdown like we saw in March and April even remotely likely any time soon. But the fact that professional sports leagues are having reopening plans derailed by the virus is concerning. College football may not restart as planned. There may be no baseball this year. The Belmont Stakes was run before a crowd of zero. What looked like a smooth optimistic reopening just a few weeks ago is now an opening that raises a lot of questions. That may not be all that surprising, but it does erase the one-sided optimism that was in place just a few weeks ago.
Not all reopenings are going badly. While no one can tell for sure where all the new patients got infected, the fact that the demographics today are skewing toward much younger populations suggests strongly that large gatherings on beaches, in bars, and in private gatherings are more to blame than golf courses. What we don’t know is that while the first wave of new infections is skewing toward younger populations, what happens when those infected intermingle with their parents and other older individuals. The virus itself never went away. It appears that the primary cause of infection is the transmission of droplets from one person to another. What has changed since it first appeared is the degree of contact, the extent of social separation. Masks, social distancing, and being outdoors all slow the rate of new infections. We appear to be at an inflection point. With racial unrest receding off of the front page, at least for the moment, Covid-19 is taking center stage again. As we saw in February and March, infection rates can rise exponentially if left unchecked. While no one wants or expects a return to the mass lockdown state we lived through just a couple of months ago, some intervention is increasingly likely.
Will those who feel less vulnerable start to wear masks more often? Will bar crowds become smaller without forced action? We will see. But as more young people are infected, perhaps they will take the disease more seriously. The moves from Apple and a few other corporations also signal a path forward. The Federal government has been behind the curve from day one. States were better. But businesses, malls, sports leagues and Broadway shut themselves down. If workers aren’t safe, businesses will stop operating. We have learned best practices along the way. America has gotten lax for a few weeks and the impact shows. We are unique in the fact that virus counts aren’t falling as they are throughout most of Europe and Asia. Brazil and India show what happens without any coordinated response.
We still have weather on our side. It doesn’t seem that high temperatures make a big difference but being outdoors clearly slows the rate of spread. Schools are set to reopen in about two months. Economically, we need schools to reopen or many more of us will be physically locked in place than we want to see. The economic impact of schools being virtual will be real and it will be negative. Harvard is already talking of virtual classes with only a modest on-campus presence. That’s not what we hoped to hear 30 days ago.
Therefore, as a nation we have about two months to get our collective act together. The good news is that the death rate continues to decline, a function of demographics and more effective care. The fact that the bad news of increasing virus counts and, in some geographies, rising hospitalizations, is back on the front page is a wake up call to everyone to take Covid-19 seriously. Simply said, as long as the disease is present and there is no vaccine, we are going to have to make adjustments in how we live our daily lives. We will miss the concerts and the football games but they will return.
Economically, this is a bit of a bucket of cold water. The stock market is taking it all in. Airline and cruise ship stocks aren’t flying higher any longer. The start date for cruises has now been moved back to September 15 and don’t be surprised if it gets pushed back further. We may not see professional sports that require close contact this year. Restaurants may not be able to reopen fully. Will Rockefeller Center at Christmas look normal or will it look like Times Square today? When can Broadway reopen?
One thing we learned is that businesses have shown a great ability to react. Disney# will show Hamilton on July 3. Movies will go directly to pay-per-view streaming. Service businesses can operate just as effectively with people working from home as they can with everyone in the office. But not all businesses can return to normal volumes in an abnormal world. All the sidewalk seating and takeout orders will allow restaurants to cover their costs. Some businesses simply require direct contact. Those are and will be the most vulnerable.
For all the above reasons, I suspect the recovery in the stocks of companies that require close contact to operate will pause until it can be demonstrated that Covid-19 can be contained. Contained doesn’t mean zero. But recent spikes have to be taken seriously. States like Arizona, Texas and Florida, are just starting to react. No governor wants to impose any restrictions. But the costs of selective actions will have to be measured against the consequences of virus spread getting out of control. I don’t want to get into politics, but I suspect one reason for the small crowd size at Saturday’s Trump rally in Tulsa is that all Americans, conservative or liberal, don’t want to get Covid-19. Even if politicians want to act a bit dopey, we found out most Americans have common sense. Hopefully, common sense and a bit of smart focused actions to contain the spread will allow the recovery now in place to continue.
The stock market’s optimism of just two weeks ago is becoming a bit tempered. It will move with the news. If outbreaks surge, stocks will retreat. If hospitalizations and death rates can keep falling, the market will hold together fine. Right now, we are all getting a wake up call. “We” includes all of us and our governments. Mother Nature gave us two ears and one mouth for a reason. Hopefully, we all start listening and realize the virus threat is every bit as strong today as it was in February and March. If we don’t listen, stocks will reflect our lack of judgment sooner rather than later.
Today, Meryl Streep and Senator Elizabeth Warren are both 71.
James M. Meyer, CFA 610-260-2220