How Investors Should Approach America’s COVID Uptick

In recent weeks, what seemed like a receding COVID outbreak in America has reversed course, with US daily cases troublingly hitting new highs on Tuesday and some states reporting tight hospital capacity. The resurgence has many pundits expecting a return of broad lockdowns—which they argue could upend stocks’ rally. While the increased spread is unquestionably bad news, we caution against drawing market conclusions from it. Lockdowns are political decisions—unpredictable. Moreover, it isn’t remotely clear a return of restrictions on the scale of this spring is coming. In our view, basing investment decisions on renewed lockdown fears amounts to dangerous speculation on a factor no one really has—or can have—any special insight into.

Daily new cases have risen in three-quarters of states from two weeks ago and topped 48,000 on Tuesday—the highest figure yet in the outbreak.^[i] About a fifth of states—concentrated in the South and West—saw record highs over the last week, while only a handful of mainly Northeastern states experienced declines.^[ii] New cases in Arizona have quadrupled in the last two weeks, with reports of ICU units running over capacity.^[iii] In Texas and Florida, two of the largest states by population and GDP, cases have tripled over the past two weeks, pressuring their regional hospital systems’ capacity.^[iv] In response, Texas paused reopening, shuttered bars anew and halted elective surgeries in its biggest cities. Florida, Arizona, California (the largest state by population and GDP) and others have also postponed their reopening plans. Many investors fear it won’t stop here. A pause leaves most businesses open, if at reduced capacity. Most seemingly fear a return to broad-based lockdowns seen in March and April, cutting short the nascent economic recovery evident in recent data.

Although spiking caseloads is alarming from a public health perspective, we think the key question for investors is the degree to which markets expect economic activity to shut down. Considering stocks have grappled with second-wave risks for months, the latest events aren’t exactly coming out of the blue. For a new lockdown to sway markets beyond a near-term hit to sentiment, it would likely need to be worse than presently feared—which seems to be quite a lot. In June, a second wave topped concerns in Bank of America’s widely followed fund manager survey for the third straight month.^[v] Among economists, 73% surveyed by FiveThirtyEight last week predicted “a steep [GDP] drop followed by a quick partial recovery and a longer period of slower, mixed growth,” with a second wave the top risk to their forecasts.^[vi] Meanwhile, the Business Roundtable’s Q2 survey of chief executives showed most expect recovery by year end, but 27% think a recovery could stretch beyond 2021 as hot spots flare.^[vii]

Ordinarily this is where we would explore the likelihood expectations are too dim or lofty. In this case, however, doing so is complicated by the fact lockdowns are political decisions. How much governors or local officials are willing to roll back reopening isn’t easily forecastable. On June 10, California officials said, “Despite the upward trajectory of cases and a growing death toll, there are no plans to reverse course.”^[viii] They have since re-imposed a lockdown in Imperial County (a sparsely populated strip of desert bordering Mexico). Governor Gavin Newsom may be reluctant to shut down other counties, but as he said Monday on the potential for more restrictions, “We are considering a number of other things to advance, and we will be making those public as conditions change. This is a dynamic process, not a static one.”^[ix] That statement’s precise practical meaning—what “things” under which “conditions”—is inherently unknowable, as is the related economic impact. Meanwhile, after Florida shuttered bars statewide last Friday, Governor Ron DeSantis yesterday declared his state is “not going back, closing things,” further saying: “We’re open. We know who we need to protect. Most of the folks in those younger demographics, although we want them to be mindful of what’s going on, are just simply much, much less at risk than the folks who are in those older age groups.”^[x]

Other countries’ experiences suggest a return to full lockdown may be untenable. In France, authorities have rejected wholesale backtracking even if a “worst case” second wave hits.^[xi] Ireland’s government is keenly aware many businesses “would simply not survive a longer shutdown,” and has ruled out bringing the economy back to a complete standstill.^[xii] Meanwhile, in the UK, the city of Leicester is back under full lockdown with non-essential businesses shut as it deals with a material uptick (rare in Europe at present).

While each country, state, county and city charts its own course, reopening isn’t entirely up to government officials. Some businesses are making their own decisions. Amid conflicting state and county messages, one Houston bakery chain voluntarily shut its dining rooms. As its chief operating officer said: “It’s a scary time. At some point you just have to grab the reins of the horse and say, ‘I just have to make the decision myself and not wait for someone else to mandate what I have to do.’”^[xiii] Some larger firms—like Apple—are also selectively closing stores in areas seeing an uptick. Our review of commentary from financial firms shows this is a factor closely being watched in the investment community.

How all this ends is anyone’s guess, but one thing we can say is attention on these issues is enormous. Many suggest markets are ignoring the implications. But in our view, given the ubiquity of these fears, it is more likely they already weighed them to a great extent. It is one factor stocks seemingly considered in the February-March drop. Markets typically look forward anywhere from 3 to 30 months, pricing opinions, fears and forecasts about what is likely to occur in that span. During February and March, we would suggest it focused on the very near end of that range. But once it weighed those fears, we suspect the market shifted to the longer end, looking ahead to recovery. How far exactly isn’t knowable, but we suspect markets are well aware the path to get there would be uneven, filled with occasional virus upticks and the potential for renewed lockdowns. So in our view, the question is: Will reality prove worse than what stocks already anticipate? We don’t think that is a question that can be answered now, giving investors nothing useful to act upon today.