COVID-19 case counts continue to rise across the U.S. to new peaks, and hospitalizations are also rising but at a lesser pace. Fortunately, even while adjusting for a lag, COVID-19-related deaths have remained at their lower levels, possibly due to better health care treatments and a younger weighted-average age of people contracting the virus. Even with a falling mortality rate, the COVID-19 resurgence in the face of reopening economies presents a potential impediment to economic recovery. There has been a tremendous amount of fiscal and monetary stimulus to fill the gap, which we expect to continue. Cash flow and consumer spending normalizing is the key to sustaining economic and capital market recoveries. High frequency economic data should give us an early indication of progress on that front.
Trends haven’t meaningfully shifted in the two weeks since we published our last Weekly Strategic Insight. COVID-19 case counts have continued to rise, especially in the hotspot areas like Florida, Texas, Arizona, California, etc. The number of new COVID-19 cases reported each day in the U.S. had fallen from 30,000 in April to 20,000 by the end of May, but now stands at a new peak of 50,000+. The increase in cases coincided with the reopening of the economy, as 42 states emerged from state or regional lockdowns.
Hospitalizations are also on the uptick, but currently remain lower than their peak. Hospitalizations are more spread out and impacting a larger swath of the country, whereas the early weeks of the wave tended to concentrate in New York, New Jersey, and Washington state.
Thankfully, death rates have remained subdued. Deaths will operate on a lag, so numbers may increase in the next few weeks, but there has already been enough time passed to see the difference. Part of this decreasing death rate is better treatment, as medical care has improved as we have learned more about the coronavirus. However, most of it is likely due to the changing demographics of new cases. According to the Center for Disease Control’s weekly publication, COVID View, and as highlighted in the chart below, the share of COVID-19 cases of patients 65 years and older has declined significantly since April, which has material implications on the number of fatalities. The mortality rate through May was roughly 1% for those under 60 years old, but it was approximately 15.6% for those 60 and over, according to CDC data.
A recent Vanderbilt study found the same results – in Tennessee, COVID is now infecting a younger and less vulnerable population.
Although this resurgence is proving to be less lethal, the obvious question is whether the infection surge will impede the economic and capital markets recovery efforts.
This coronavirus recession that we are dealing with is primarily a cash flow issue. The U.S. economy is almost 70% consumption-based, and consumers have less income or even no income, which means businesses have less revenue or no revenue. Reopening the economy is incredibly important to resume cash flow, but also incredibly difficult. If it is done too quickly, you risk a material second wave of infection, but if it is done too slowly, businesses will permanently shut down, making it increasingly difficult to absorb the excess labor supply that was created in March and April.
Even after making strides for the last two months, there were still 18 million people that filed continuing unemployment claims this past week and another 14 million people receiving Pandemic Unemployment Assistance (special federal program for the self-employed). That is up from 1.7 million pre-coronavirus. Continuing claims may be somewhat artificially inflated because of the increased amount of federal unemployment benefits ($600 per week) from the CARES Act. We will find out soon because that expanded amount runs out at the end of July and is not likely to be extended at that level.
The policy response that we have seen over the past few months has tried to address the cash flow shortage. The chart below measures both the monetary and fiscal stimulus in terms of dollars and as a percentage of gross domestic product.
The CARES Act and fiscal stimulus gets the headlines, but as you can see, the Federal Reserve has provided an enormous injection of stimulus funds that have not been fully distributed. The $6 trillion dollar figure above doesn’t fully capture the guarantees and leverage in special funding vehicles. When you add up everything, it’s possibly more than $8 trillion in stimulus for a $21 trillion U.S. economy.
There may be limits to how long the federal government can pump money into the economy. The risk is that we bring things back online too slowly or downshift to reopening phases 1 or 2, leaving workers have no place to work. This would lead the consumer to come under even more pressure, particularly if fiscal support begins to wane.
This tension between the health of the people and the health of the economy looks set to persist until we have antivirals or vaccines. Monitoring high frequency economic data will be key to understanding where things stand with respect to the recovery.
In the meantime, an investment approach that focuses on both quality and global diversification should provide opportunities for recovery growth and ballast against volatility.
Have a great Sunday!
Timothy W. Ellis, Jr., CPA/PFS, CFP®
Senior Investment Strategist, Wealth Strategist