Stocks traded within a narrow range on Friday. The Dow was the biggest loser among the major indices, courtesy of a sour economic forecast by component Intel. Otherwise it was a quiet Friday.
Over the weekend, however, the Covid-19 news worldwide was discouraging. Cases are surging in Europe and rising throughout the U.S. If you can remember back to February, which seems like forever in this very strange year, you might remember that as places like Italy were starting to lock down, the stock market kept rising. That is until the thought hit investors that what was happening in Italy and Spain was about to hit us. You know the rest. Stocks tumbled 35% in just a matter of a few weeks. Everyone was glued to their TV sets. The economic world shut down. In 2008 we didn’t know if our bank accounts were safe. In 2020 we didn’t know if leaving our house was safe. In March, masks were hard to come by. So was toilet paper and anything resembling cleaner.
For the past year, we have heard the saga of the 1918-1920 Spanish flu epidemic. It started in early 1918 about like Covid-19 started, with a hearty scare and a surge in deaths. After a summer reprieve, it returned with a vengeance in the fall, killing record numbers of people. It faded again, made a brief and much less fatal return in the winter of 1919, and an even weaker final return in the winter of 1920. If the present mimics the past, we are entering the season every epidemiologist feared, the mid-fall when our resistance to safety standards has weakened just as cold weather sends us back indoors.
This morning stock futures point lower as investors wake up to the idea that maybe the recent surge in the U.S. is more than just a blip. In some European countries, weekly cases are now 2-3x what they were last spring. While hospitalization rates are rising, they are not yet back to spring peaks and, thankfully, deaths still lag. But if the spike gets larger, both hospitalizations and deaths will follow.
The stock market has no emotions. While we all care very much about the severity of this new outbreak from a health standpoint, the stock market only cares about the economic impact. So far, at least in the U.S., it has been minimal. But if the surge in Europe is repeated here, and there is little reason not to expect the same, there will be an economic response. While no one yet is discussing a lockdown on the order of last spring, what you will see are two things, both of which will impact the economy. First, governments will put local restrictions into place to try and both isolate and prevent community spread. They will close, again, those activities deemed most conducive to the spread of the virus. This would include bars, movie theatres, gyms, etc. They will also slow the reopening of schools, and enforce mask requirements. Those steps will be uneven across states but will have an overall impact.
The second impact, and maybe the more important one, will result in actions we take ourselves. We will be more reluctant to eat out or go to malls. We will avoid movie theatres and gyms, even if they are open. We may not quarantine in place like we did in April, but we will restrict what we do in a way that has economic consequences. We will drive less, avoid planes and shelter in place more than we do today. The older we are, the more careful we will be. But understand that the early fall case count rise associated with school reopenings and concentrated in teens and those under 30 is now spreading.
We won’t get to the threat that existed in the spring, most likely because we have learned a lot over the past six months. Roughly half of deaths occurred in nursing homes. That population continues to be very frail and exposed. But nursing homes today are much better equipped to handle the risks. They will lock down quickly, and test often. That won’t prevent deaths but will reduce the number significantly. Testing overall is much better today. Look at the Pence campaign team. Five have now tested positive. They are isolated. The rest are tested daily. Any sign that they are positive will lead to more isolation. One can argue that more should be isolated sooner, but I am not going to mix politics and health policy here. The key point is that isolation and testing will limit spread. More experienced medical care will also limit the death rate. We have learned how and when to use ventilators more effectively, for instance. While key therapeutics aren’t ready for prime time yet, secondary drugs are and have some positive impact.
All this suggests that a repeat of the stock market crash of the spring isn’t in the cards this fall. First, with complete hindsight, the decline was overdone. The world didn’t end. The economic world didn’t end. It now appears that earnings this year will fall about 20%, plus or minus, far less than what was feared in the spring. As predicted, many sectors like retail, restaurants, travel, etc. were hit hard. A fall surge will delay the time to recovery, but by months, not years. That doesn’t mean that I am suggesting to buy into a correction caused by a virus surge. Far from it. While I argue that the 35% fall in the spring was too sharp, it can also be argued that the recovery didn’t fully discount a large second wave. Without a fall surge, restaurants were ready to return to near capacity in some markets. That is now less likely. Schools have been reopening. If the case counts continue to climb, that will be aborted. We are already seeing 4th quarter growth forecasts pulled back. But everyone still expects Q4 to be better than Q3. So, we continue to move in the right direction.
Here we are at the end of October, just 8 days before a Presidential election that offers us the most stark contrast between candidates since perhaps 1932. And yet, despite all fears, the stock market seems to be saying that the economic differences between the two candidates aren’t nearly as impactful as the economic impact of another wave of Covid-19. Obviously, a lot will depend on not only who is elected, but who controls the Senate. Perhaps the market is waiting to make its bet.
If Trump is reelected, politically four more years of gridlock are almost guaranteed. He can raise tariffs or impose rules that may help or hurt certain industries. But the impact of Executive Order is far from the impact of legislation. As for Biden, obviously a bigger unknown, the makeup of Congress will matter as will his cabinet appointments. Markets fluttered in early 2009 when Timothy Geithner turned in a poor performance in hearings seeking approval as Treasury Secretary. But he survived the scare and markets soon bottomed. Clearly, should Biden win, his choice of Treasury Secretary will be market moving. But between now and the election aftermath, it appears the path of Covid-19 is destined to dominate markets once again. I don’t think there is much doubt that case counts are headed higher over the next few weeks. The reaction will be to the pace of surge and the subsequent reaction both by governments and by us as individuals. But with history as a guide, what lies immediately ahead is probably the worst of times. It may last 1-3 months, but as the old saw says, it is always darkest before the dawn. So don’t be too aggressive here, but get your shopping list ready.
Today, Keith Urban is 53. Former Presidential candidate Hillary Clinton is 73. Pat Sajak turns 74.
James M. Meyer, CFA 610-260-2220