Moderna may or may not have the key to the city. Only time will tell. The media loves headlines that note the creation of antibodies and the lack of warts. Scientists want to see lots of supporting data. But hey, it’s only Phase I. Even giving Moderna the benefit of the doubt, the timetable for the ability to mass inoculate most of us against coronavirus hasn’t really changed. The FDA and others expect multiple Phase III tests this fall, and hope for at least one success by this time next year. In the meantime, therapeutic advances, not just new drugs, but successful palliative care protocols that save lives, will help.
With all that said, the really good news is that quarantining has worked, especially in hot spots like New York City. The flattening of the curve is allowing our economy to reopen. As one would expect, it is happening with plenty of glitches, many caused by overbearing governors and mayors with good intentions. But we are all destined to get to the same end game over the next 30-60 days. In general, all non-contact outdoor activity will resume in fairly normal fashion. Shops, malls and restaurants will reopen with wider spacing and meticulous attention to cleanliness. Businesses will reopen as well, although many people, particularly those at risk or with child care concerns, may continue to work from home if applicable. If infection numbers stay within bounds, by later in the summer we should even expect a pick up in airline travel, hotel occupancy, and national park visits. The one imperative that still has to be solved is how to reopen schools safely this fall. It will happen, the only issue is how. Simply said, our economy cannot function normally with students locked up at home sitting in front of a laptop screen.
The stock market’s direction since late March reflects this optimism. What we have been learning from companies that have reported second quarter earnings is that the low was in late March and early April. Recovery since has been moderate but steady. The economic numbers at the abyss are dismal. GDP from peak to valley may have fallen 40%. Unemployment rates in May will approach 20%. Capacity utilization is down to 65%. Oil prices, while up from zero, are still half of where they were a year ago. Air travel is up 150% from the early April bottom, but still more than 90% below prior year peaks.
Of course, the real questions are how far back do we come, and how long does it take? Clearly some sectors of the economy will suffer longer. Companies that sell basic necessities, like supermarkets and discount stores, have been doing just fine all along benefiting from household hoarding and silenced competition. Others, shuttered since mid-March, are only starting to reopen. Those will show strong sequential gains (you can’t fall below zero), but may take months or years to return to pre-March levels. Car owners are likely to keep their vehicles longer, not having put the customary 3,000-5,000 miles of wear on their cars this spring. No sense buying that spring wardrobe with summer just a few weeks away. Sales of laptops and computer gear may slow once the Apple and Best Buy stores reopen, as everyone has already geared up to work from home.
What people really miss most are experiences. They want to be with their friends and families, not just see them at Zoom gatherings. It may take weeks or months to figure out exactly how that is done, but it will happen. We may not see full football stadiums, but I am not sure they will be totally empty come fall either. For many, the tailgate parties are as important as the game.
Every day we are closer to the end of this nightmare. I can’t tell you when it ends, but I can tell you that progress is being made. That is the message of this week. Moderna’s news may or may not end up being significant. Others might get to the end point faster. Nothing changes the disease itself. It is out there and will be out there for years to come. We have to learn how to respect it and how to live within its presence. We will because we have to. Those of us at greater risk will use more caution. We still need better testing and tracing to be more effective. It is coming. Managing pandemics is a massive challenge. We learn as we go and adjust. There will be plenty of blame and accolades to throw around. The media can handle that.
Economically, it is likely that we will be far along in recovery efforts over the next 12 months, but with major sectors, mostly tied to entertainment, travel and sports, lagging for a considerable period. Getting all the way back will take time. The pandemic will also bring changes. It will accelerate changes already in place. Every single company will do business a bit differently tomorrow than it did yesterday. Many of those changes will be for the better and will improve productivity.
In the end, growth is governed by population gains and productivity improvements. Lower birth rates (we are now at a 35-year low) and less immigration mean productivity will have to do more of the heavy lifting. Productivity rises sharply early in a recovery cycle because GDP recovers faster than employment. It will take a few years to find out whether permanent productivity gains will happen. Based on the last 20 years, the outlook isn’t all that rosy. We continue to live in a world with too much capacity. Only advances in technology are driving gains in productivity.
With inflation non-existent for now, interest rates will remain ultra-low for longer, enabling P/E ratios for stocks to be higher than average. That should support further gains in stock prices not withstanding an occasional 5-15% correction that could happen at any time. Longer term the economic key is future fiscal and monetary policy. Simply said, will the Fed and Treasury keep monetary spickets open full blast for too long or not. Recent history suggests they will err on the side of ease. That’s good news in the short run but quite argumentative in the long run. But that’s a tale for another day.
Today, Cher is 74.
James M. Meyer, CFA 610-260-2220