Coronavirus Quick Take – May 28, 2020
May 28, 2020
Welcome to another day of Coronavirus Quick Takes. I know it’s been a while since our last one, and we hope to rectify that over the next several weeks. Today we’ll take a look at reopening the economy: Are we moving too fast (or not fast enough)?
Our views on this have changed since Memorial Day weekend. Beforehand, we felt that some states (e.g., New York, Massachusetts, California) were opening a bit too slowly, prolonging the economic damage with only a small public health benefit. We thought that the majority of people could be trusted to continue physical distancing while venturing out into the world for work and leisure activities. Further, warmer weather enables people to spend more time outdoors, which is a less risky environment for viral spread than indoors.
Other states (e.g., Georgia, Alabama, Texas) appeared to be opening too quickly, risking a resurgence of the virus and potentially requiring them to backtrack on reopening and reinforce strict social distancing. If we had excellent testing and contact tracing capabilities—as in several other countries—there would be less disruption when new viral clusters were found. But the US is way behind on this, meaning that case containment can’t be narrowly targeted. The only effective alternative is a wider shutdown with reinstatement of shelter in place.
Watching the behavior of crowds during the Memorial Day weekend, particularly in locales such as Houston, Daytona Beach and Lake of the Ozarks, Missouri, we learned two important lessons: 1) Many Americans cannot be counted on to behave appropriately out in the world; and 2) re-opening looks to be a one-way street. To mix metaphors, this genie is not going back in the bottle: once an area has opened, even partially, reinstating movement and distancing restrictions will likely be impossible. This supports the go-slow approach in some of the coastal states.
Economically, this is mostly good. It means that growth is returning sooner and accelerating faster than originally expected. We believe this to be a major reason that stocks have continued to climb during May, anticipating a recession that won’t be quite as terrible as initially feared. This does not mean, however, that the recovery will be V-shaped and that we’ll be back to January’s level of economic activity anytime soon. Rather, we still see a “square root” recovery, with the initial bounce giving way to more gradual improvement. The US may not see January’s level of economic output again until late next year or even 2022, and unemployment may remain elevated for over 2 years.
This forecast does not automatically imply, however, that the stock market will take anywhere near as long to recover its January highs. You need to remember two critical points about the stock market: 1) it cares only about the earnings of public companies; and 2) it anticipates these earnings by an average of 6 months. It’s a harsh reality of our capitalist system that thousands of small enterprises could be struggling or out of business, millions of people could remain out of work, but the larger companies represented by the publicly traded stock market could be doing just fine.
Every recession since 1980 has ended with more wealth in the hands of fewer people, with larger companies thriving at the expense of smaller businesses. While the socio-political consequences of increasing income and wealth disparity are likely negative in the long run, their short-run impact on equity investors is mostly positive. We believe these inequities will need to be addressed to avoid eventual social unrest, but for now, investors are beneficiaries.
What of the public health consequences of our push to re-open? The story here is one of similar disparity. People with the both the foresight and ability to physically distance will mostly avoid contracting COVID-19. Those unable to consistently distance themselves from others—employees who can’t work from home, less wealthy people living in denser environments (many of them people of color)—will not have the luxury of avoiding coronavirus. Then there are those people who have the choice but choose not to physically distance or wear masks. They will contract and spread the disease at accelerated rates compared to what more reasoned behavior would yield.
The upshot is that not only have we moved beyond containment (which would only have been possible if we had started physical distancing in mid-February), we are past mitigation as well. At this point, and probably for the duration of the pandemic (which likely will continue until next spring), we will focus on harm reduction. This means keeping the illness and death rate below the threshold that overwhelms the healthcare system. But that’s still a lot of illness and death that Americans are apparently willing to tolerate.
Looking at the bright side, we think the economy—and the financial markets—will recover more quickly than anyone expected just one month ago. But it will come at a cost of human lives. Whether most people realize that this trade-off has been made is an open question.
We’ll continue to write Coronavirus Quick Takes periodically during the pandemic. Please feel free to comment and ask any questions that come up.
The KCS Investment Team
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