Could this be the second wave we were warned about? Did we ever really get past the first wave? Could we be facing a series of rolling waves until a vaccine is globally available?
We don’t know the answers to these important questions. But we do know that 5,000 people, globally, are reported as dying with COVID-19 every day. That is not as bad as the darkest days of mid-April, but it is worse than it has been since the first week of May—and, worryingly, the numbers are rising.
As we have been warning for some time now, this is not a crisis for public health and the global economy that will be resolved quickly—and a surprisingly fast reopening of the economy is not the same as a strong, durable recovery.
While much of the recent bad news on coronavirus has come out of Latin America, this is not just an emerging market problem. In the U.S., Florida, Texas and California have recently been reporting more new cases than ever, pushing the nationwide total up to around 60,000 per day.
As a result, Goldman Sachs’ economics team estimates that 70% of the U.S. population has seen reopening plans either paused or reversed. School closures now look likely to stretch into the fall, which will likely make it challenging for workers to return to their offices, further slowing the economic recovery.
We are already starting to see the impact in economic data. After a strong rebound in May and June, the New York Federal Reserve’s Weekly Economic Index has experienced a pullback. U.S. employment data leveled off in June compared with May. Data from providers such as Open Table and Yelp suggest that restaurant reservations have declined again, particularly in the new virus hotspots, and that U.S. businesses are still closing at an increasing rate.
It is, therefore, not surprising that banks report setting aside huge reserves to cover an expected wave of loan defaults. Most companies continue to hesitate in providing earnings guidance due to the high degree of uncertainty. And it is no longer just frontline retail cutting workforces in anticipation of structurally lower demand in the post-COVID economy.
There is good news, too, however.
While daily U.S. COVID-19 deaths have been increasing, and no level of excess mortality can really be considered good news, it remains in the hundreds rather than the 2,000-per-day peak of mid-April. Beyond a few localized flare-ups, much of Europe appears to have the virus under control. Worrying resurgences in China also seem to have passed. The U.S. may simply be on a bumpy road to a similar destination.
Last week also saw positive news on early-stage vaccine trials out of Oxford University and AstraZeneca, Pfizer and BioNTech, and Moderna, as well as further promising results on the use of Gilead’s Remdesivir as a treatment for COVID-19.
In addition, talk of a “fiscal cliff,” in the shape of an imminent end to supplemental income for the unemployed, has injected new urgency into preparations for a fifth stimulus package out of Washington, DC.
The Democrats have already passed a $3 trillion bill in the House of Representatives, and Republicans are expected to counter with a smaller proposal this week, setting the stage for negotiation. Similar fiscal talks are also under way in Europe. In the meantime, the world’s major central banks keep liquidity flowing through the financial markets.
As always, for investors the important question is whether markets are priced for the good news or the bad news.
With the S&P 500 forward price-to-earnings ratio touching frothy levels and the capital markets piling into new equity and bond issues, the good news certainly appears to be winning out.
Should the U.S. sign a new stimulus into law and see its coronavirus cases level off, it would therefore likely maintain current levels of confidence rather than boost them. Decisive news on a vaccine would be a major step forward—but even that is unlikely to lead to a rapid return to pre-crisis confidence.
Ultimately, for investors to go from riding central bank-provided liquidity in large-cap growth stocks to investing in cyclical and value stocks, we think we need to see a more sustained recovery in consumption and other economic activity—with an important part of that being driven by solutions to the virus.
As long as consumers and businesses are struggling to keep their heads above the waves, that kind of recovery is likely quarters rather than months away.
In Case You Missed It
- U.S. Consumer Price Index: +0.6% in July month-over-month and +0.6% year-over-year (core CPI increased 0.2% month-over-month and 1.2% year-over-year)
- Bank of Japan Policy Rate Decision: The BoJ made no changes to its policy stance
- U.S. Retail Sales: +7.5% in June
- NAHB Housing Market Index: +14 to 72 in July
- U.S. Initial Jobless Claims: +1.30 million for the week ending July 11
- China 2Q 2020 GDP: +3.2% annualized rate
- European Central Bank Policy Meeting: The Governing Council made no changes to its policy stance
- U.S. Housing Starts: +17.3 % to SAAR of 1.19 million units in June
- U.S. Building Permits: +2.1% to SAAR of 1.24 million units in June
What to Watch For
- Monday, July 20:
- Japan Consumer Price Index
- Tuesday, July 21:
- Japan Purchasing Managers’ Index
- Wednesday, July 22:
- U.S. Existing Home Sales
- Thursday, July 23:
- U.S. Initial Jobless Claims
- Friday, July 24:
- Eurozone Purchasing Managers’ Index
- U.S. New Home Sales
Statistics on the Current State of the Market – as of July 17, 2020
|S&P 500 Index||1.3%||4.1%||0.9%|
|Russell 1000 Index||1.2%||4.2%||1.3%|
|Russell 1000 Growth Index||-0.8%||4.5%||14.7%|
|Russell 1000 Value Index||3.4%||4.0%||-12.9%|
|Russell 2000 Index||3.6%||2.3%||-11.0%|
|MSCI World Index||1.5%||4.3%||-1.4%|
|MSCI EAFE Index||2.2%||4.1%||-7.4%|
|MSCI Emerging Markets Index||-1.2%||6.5%||-3.8%|
|STOXX Europe 600||2.5%||5.3%||-7.4%|
|FTSE 100 Index||3.2%||2.1%||-15.1%|
|CSI 300 Index||-4.1%||9.8%||12.8%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||0.0%||0.0%||2.9%|
|Citigroup 10-Year Treasury Index||0.1%||0.3%||12.8%|
|Bloomberg Barclays Municipal Bond Index||0.4%||0.9%||3.0%|
|Bloomberg Barclays US Aggregate Bond Index||0.2%||0.8%||7.0%|
|Bloomberg Barclays Global Aggregate Index||0.2%||1.1%||4.1%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||0.8%||1.6%||-2.4%|
|ICE BofAML U.S. High Yield Index||1.2%||2.3%||-2.6%|
|ICE BofAML Global High Yield Index||1.0%||2.2%||-2.1%|
|JP Morgan EMBI Global Diversified Index||0.7%||1.7%||-1.1%|
|JP Morgan GBI-EM Global Diversified Index||-0.1%||1.2%||-5.8%|
|U.S. Dollar per British Pounds||-1.0%||1.4%||-5.4%|
|U.S. Dollar per Euro||0.9%||1.7%||1.8%|
|U.S. Dollar per Japanese Yen||-0.4%||0.7%||1.4%|
|Real & Alternative Assets|
|Alerian MLP Index||2.4%||-4.0%||-38.3%|
|FTSE EPRA/NAREIT North America Index||1.1%||-0.4%||-21.3%|
|FTSE EPRA/NAREIT Global Index||0.0%||0.5%||-20.7%|
|Bloomberg Commodity Index||-0.2%||2.3%||-17.5%|
|Gold (NYM $/ozt) Continuous Future||0.4%||0.5%||18.8%|
|Crude Oil WTI (NYM $/bbl) Continuous Future||0.5%||3.8%||-33.3%|
Source: FactSet, Neuberger Berman.