Today we present another installment of our COVID-19 client communications. To date our communications have been focused on the pandemic, cases in the U.S. and across the world, and the devastating effects on the global economy and investment markets. In this note we will focus on the current virus status and the outlook for a return to normalcy for our lives and economy. But, before we get to that it makes sense to take at least a quick look at recent market conditions. After hitting what is currently the cycle low on March 23rd, where markets were down a full 35% from the previous high in February, an impressive market recovery has started. As of Friday, April 17, the market is now down “only” ~16% from the February high, a 26% recovery from the cycle low.
Much of that recovery is due to the very rapid response from Washington D.C. with a $2.2 trillion stimulus plan designed to help small businesses and individuals survive under the pressure of business closures and growing unemployment. Speaking of which, the speed and number of unemployment applications is entirely unprecedented, far outpacing any previous cyclical economic recession. Over 22 million people have filed for unemployment insurance since the government-induced shutdowns began. But as bad as that news is, the markets see the unprecedented speed of government response as a reason to be positive. The general sense is that Washington D.C. will continue to provide support programs with the same speed as conditions require. While we continue to believe we aren’t fully out of the woods in this market, it does appear likely that March 23 will hold as the cycle low. From our view, improving on the current -16% market condition will be entirely dependent on getting the economy back on track. A process that will likely come in fits and starts, and one we have no historical comparison to make. Here’s our sense of how it may play out.
Getting the economy started again creates the following immediate health issue – if you allow people to go to work, re-engage in business transactions, enjoy relaxation at their favorite gatherings, and perhaps even stop at a restaurant for a nice dinner, how do you prevent those same people from becoming infected with the virus, or infect others if they are unknown carriers? The fear is that getting too much economic activity too quickly could lead to a second round of new virus infections. The President’s administration has offered a 3-phase set of guidelines to help the economy re-open with gradual steps. Here are the (simplified) Washington guidelines. To get to Phase 1 you must have in place 14-days of reduced cases; non-crisis conditions in hospitals along with “robust” testing for healthcare workers. Then, once in Phase 1 the conditions are: high-risk individuals should remain quarantined, continue 6-feet social distancing, minimize non-essential travel, tele-work if possible, closed schools remain closed, senior facilities restricted, avoid large groups. If infections continue to decline for another 14 days, then Phase 2 can be entered, where; high-risk individuals remain quarantined, groups up to 50 are OK, non-essential travel resumes, tele-work if possible, schools reopen, senior facilities restricted, bars can open with limited capacity. After another 14 days of reduced infections Phase 3 can be entered with these conditions; high-risk individuals can go public with social distancing, work places can resume, senior facilities can open, groups over 50 are OK with some distancing protocol, larger capacity bars may open. [We assume “bars” is a reference that includes restaurants, though we have been unable to find any confirmation of that].
Considering those guidelines, let’s see what the situation is here in the U.S. The 10-day average of new infections on April 14 was 33,795 and on April 19 it was 28,746. Now, it’s important to understand that finding more infections can be a direct result of increased testing, so let’s try to better understand that. Looking at the last ten days of testing is less informative as there are lags in the data reporting, so we’ll go back 20 days. Using the same logic of looking at the 10-day average of tests performed on April 10 saw 11,864 tests completed and on April 15 it was 10,851. This is an indicator that testing did not ramp up considerably and should not be artificially boosting the new case count. Thus, we have what might be a peak of new infections reached within the past week or so.
Using the daily new infection count and the federal guidelines would put us only about two days into a declining number of new cases. If all went perfectly we would not even qualify to enter Phase 1 until early May (to reach 14-days of declining new cases). Then assuming all continued to go perfectly we wouldn’t enter Phase 2 until mid-May and not enter Phase 3 until early June. This assumes no spike of new infections due to reduced social distancing. State governors have a large degree of local control and they will ultimately decide if their state chooses to follow the Phases or the timelines suggested. However, if a state moves too slowly to re-open their economies the result could be protests from constituents, similar to those seen recently in California.
The good news here is that a re-start of our economy, and the possibility of getting back to something closer to normal to our daily lives, could start in May. Given that many people are experiencing “cabin fever” it seems that timing could be a blessing. Many “ifs” remain in this scenario, but overall the markets should respond positively to what would appear to be our country starting to move past the pandemic. However, any recurrence of new infections or delays in progressing through the Phases will likely generate negative market reactions. Overall, we believe the S&P 500 will get back to around 3,100 in the next twelve months, but it could be a bumpy ride along the way, especially in these early stages. Again, we have no historical comparisons we can learn from.
We will continue to research the situation and markets and our plan continues to be to make trades as we feel are in the best interest of our clients. We expect these trades will be profitable within a year. We firmly believe market pull-backs like this provide investment opportunities.
We hope this note helps explain our views of the ongoing pandemic and a possible recovery. Based on the current COVID-19 guidelines we temporarily aren’t meeting with clients in-person, but please feel free to call us with questions or for further discussion.
Barron Financial Group, LLP is a fee-only Registered Investment Advisor regulated by the Connecticut Department of Banking.
This newsletter is for general information only and should not be considered investment advice. Investors should consult with a trained investment professional to discuss their particular situation.