| Asked last month about when fatalities and hospitalizations would meet state thresholds for reopening, Mr. Cuomo responded: “All the early national experts, ‘Here’s my projection model.’ . . . They were all wrong. They were all wrong. . . . There are a lot of variables. I understand that. We didn’t know what the social distancing would actually amount to. I get it, but we were all wrong.” The Wall Street Journal, “What Covid Models Get Wrong” June 18, 2020 The U.S. policy emphasis for the pandemic appears to be shifting from economic shut-down to crisis management. On Monday, Mr. Gavin Newsome, the governor of California, said “We have to recognize you can’t be in a permanent state where people are locked away—for months and months and months and months on end—to see lives and livelihoods completely destroyed, without considering the health impact of those decisions as well.” And while the University of Washington’s Institute for Health Metrics and Evaluation[1] has issued a new forecast that Covid fatalities could increase over the summer and see a resurgence in the fall, Stanford epidemiologist, John Ioannidis explains in a new paper that most models have overshot by making incorrect assumptions on virus reproduction rates and equal susceptibility across populations.[2] For example, a Massachusetts General Hospital model predicted 23,000 deaths in Georgia, the first state to reopen, but Georgia has had only 896. Forecasting errors like this have tended to be in the 10 to 20 times multiple range. For example, early estimates in the U.S. were for 2 million deaths, as compared to current projections, which have ranged recently from 140,000 to 200,000. Even in the face of rising infection rates, policymakers may now shift their attention to hospital utilization and mortality rates. We noted last week, in states where there have been rising rates, lower utilization and mortality rates suggest that the crisis can continue to be managed without another lockdown (see below chart). Hospital utilization has remained relatively flat, even with the uptrend in cases, in states such as California. Continued development in therapies is supporting this trend in declining mortality rates with this week’s announcement of an application of a readily available steroidal drug, dexamethasone, as only the most recent example. In the meantime, a wash of new studies is finding that in addition to the models not accurately forecasting the impacts of the pandemic, the shutdown itself was only marginally beneficial. A recent paper by the University of California at Berkeley found that, while social distancing reduced person-to-person contact by 50%, more stringent shelter-in-place rules only further reduced contact by another 5%.[4] A USAToday analysis found that over 40% of the mortalities have come from nursing homes, suggesting that despite whatever shelter-in-place directives may have accomplished, it failed to protect some of the disease’s most vulnerable populations.[5] Markets Why do we continue to focus on the pandemic each week in our analysis? Because market performance will be driven by the pandemic and how it impacts corporate earnings, at least for the near term. As we await second quarter earnings over the next couple of weeks, we have been encouraged by leading indicators, which in large part have exceeded earlier estimates. One chart from yesterday morning’s update from Baird-Strategas provides additional support to a V-shaped recovery, with the Citi Economic Surprise Index resting at an all-time high. This week’s retail sales number of 17% vastly exceeded the 8% expected by economists and, while yesterday’s first time unemployment claims number was somewhat above estimate, other indicators like airline traffic and restaurant reservations provide a sign that the economy continues to rebound. Both the corporate and municipal bond markets continue to see strong demand backed by Fed support. For example, a recent JFK airport bond backed by American Airlines/British Airways was 10 times oversubscribed, allowing them to increase the size of the deal. We have also seen universities and New York bonds come to market and receive strong interest. While we would not invest in these higher risk issues, it does demonstrate significant support to the overall market. The downside of this positive stabilization in credit is that yields have dropped to all-time lows, and it appears will stay there for quite some time. In light of this low-yield environment, our research team is diligently working to develop investment options for supplementary income in dividend-oriented investments, and we will be reporting on this more in the days to come. |
