Kenneth Rapoza, Senior Contributor
July 9, 2020
The latest bout of the new SARS coronavirus in the American south is more like a first wave than a second. But who can explain California? They had a wave, closed down for months with early stay-at-home orders and then, bam! Another set rolls in. This looks a lot like a second wave, at least in California. The coronavirus just won’t die. I’m going to keep saying it: you can run...but you can’t hide from Covid-19.
There is going to be some economic impacts of a second wave in states that already wrestled with this, like New Jersey, for instance, where the state is now back to closing indoor dining at restaurants. One step forward, half a step backward.
Second wave infection fears have come to the fore, as the seven day moving average of net new reported Covid-19 case counts has hit a new high of 40,000, eclipsing the previous infection peak from early April.
It’s possible that improved testing capacity may be contributing to the rise, but that does not change the fact that the U.S. is facing a significant number of coronavirus cases that could lead to hospital strain, a total headwind to the U.S. economy if that unfolds.
“If the underlying reason for social distancing is to flatten the curve to avoid placing significant strain on medical facilities, it also makes sense to track trends in hospitalizations,” say Glenmede’s Jason Pride, CIO for private wealth. So far, while the number of individuals requiring serious medical attention has risen significantly in places like Arizona, Texas, and Florida, overall hospitalizations remain below what they were in the Tri-State Area in March and April. Those states got soaked by missteps in caring for elderly patients of Covid-19 in nursing homes. The southern states are not going to repeat that mistake.
The reproduction rate, referred to as R-naught, is less than 1 in 40 states, meaning for every one person with the virus, they spread it to one other person around 50% of the time.
An R-naught of over 1, or 1, means for every person with the virus, they give it to one other person. Bad.
Note that Arizona, Florida, Texas and California, the states with the most infections, accounts for 40% of the U.S. economy. The threat of a pull-back in economic activity is possible, by the looks of things, for the rest of July.
Just when you thought it was safe to enjoy your summer...
Goldman Sachs just revised down its forecast of a recovery in U.S. GDP for the third quarter to an increase of 25% annualized from an increase of 33% previously. For 2021, Goldman retains its forecast of a 5.8% increase in GDP after a 4.6% decline this year.
“Equity markets are ignoring this – presumably on the basis that it merely underscores prolonged accommodation in terms of the economic policy stance,” Neil MacKinnon, an economist for VTB Capital, said on Monday.
The prospect of ‘more stimulus, more liquidity’ keeps equity markets elevated.
For Glenmede, they have their own in-house “Reopening Index.”
How’s it looking?
In the fast-moving environment precipitated by the pandemic, traditional economic indicators such as retail sales may not be timely enough to effectively track reopening efforts as they occur. The Glenmede Reopening Index measures the reopening of the economy through a combination of high-frequency data from daily and weekly sources.
As of now, the model estimates that around 44% of economic activity that was lost due to social distancing has come back. But as multiple states begin grappling with a second wave of lockdowns, that number could flatline, or even decline in a worst case scenario. Investors won’t like that, unless they are looking for lower prices to buy back in.
The last phase of a rally is usually one of euphoria, with investors dismissing negative headlines and high correlation of asset prices either in clusters, pair trades or more broadly — a particular type of stock, or bond. Tech stocks in the U.S., for example. Amazon and Microsoft’s market cap is now worth more than the Brazilian economy. That’s crazy, right?
The underlying question for investors will be whether the U.S. recovery matches the potential in national earnings projections that Wall Street is forecasting. If it does, market rises. If it doesn’t, the market declines this summer.
“I would venture that with lower structural growth, and a higher debt burden leading to higher taxes, then this path (to earnings growth) grows at a slower speed,” says Nordea Asset Management’s macro strategist Sebastien Galy. “And that means lower highs in the S&P 500.”
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