| On Thursday, the market sold off nearly 6 percent in one day, after rallying for several weeks. The sudden drop seemed to follow investors expressing concerns around two issues: 1) What’s the risk of a second wave of the virus? and 2) What about the slow path to recovery? Let’s take each in turn: The Path of the VirusThe news is reporting this week that coronavirus infection rates have been rising in 12 states despite the overall numbers continuing to fall. States like Arizona, Florida and Texas have received a fair amount of attention. Arizona’s daily case rates have increased 125% since reopening on May 6. However, a deeper dive into the numbers being reported by the Arizona Department of Health reveals a mixed picture. What has not been a point of focus in reporting on the case rates in Arizona is that hospitalization and death rates have plummeted from one month ago, down 64% and 73% respectively.[1] Accordingly, these increases have not disrupted hospitalization utilization rates, which have remained relatively stable over the last few weeks in the 73-78% range. Texas, the second most populous state in the U.S. with nearly 30 million people, has seen the level of hospitalizations since the reopening on May 11 increase by 280 cases. These numbers are consistent with Florida’s recent increases. There are other states that were among the first to reopen, like Georgia, which have not seen any real pick up in new rates of infection. Absolute numbers could, of course, increase if the topline infection rates further accelerate, so we will continue to carefully monitor this trend. In the meantime, the overall picture continues to improve for the nation, with both declining daily new infections and deaths since the states began reopening in late April:[2] The Path of the Recovery Last Friday’s positive surprise on the 2.5 million jobs in the month of May capped the market’s recent achievement of the fastest market recovery on record, but volatility re-entered the market this week following Fed Chairman Jerome Powell’s comments from the Federal Open Market Committee (FOMC) meeting on Wednesday. The FOMC announced holding the target rate low in the range of 0% to 0.25% with a unanimous 10 to 0 vote. Overall the statement was fairly uneventful, but there are interesting takeaways from some of the projections and commentary. Almost all of the policy members expect the Fed funds rate to remain near 0% through the end of 2022. Only two members out of the 17 are in favor of raising rates even in 2022. Regarding the timing and size of future adjustments to rates, the Fed reiterated that it will take into account labor market conditions, inflation pressures (which continue to be muted) as well as financial and international developments. For bond investments this means that our emphasis on quality will continue to serve as an important source of liquidity and stability in the portfolio. As rates eventually begin to normalize we will be able to buy into issues at higher rate levels, just as we did following the 2008 crisis. The Fed plans to keep rates low, adjust as needed and continue to support the economy as necessary. Powell cited an “unbalanced nature” of the recession and reiterated a few times that they want the markets to be working. The Fed-provided liquidity has been a powerful mix for stocks, but Powell did make it clear that once the crisis has passed, the Fed “will put these emergency tools back in the tool box.” The Fed’s projection of 9.3% unemployment by year-end was also very much in line with our earlier estimate of 8-10%. Yesterday’s new claims for unemployment (1.54 million) were approximately 23% below the consensus estimate, providing further evidence of an improving labor market. This bodes well for stocks over the long run. The pullback on Thursday was a reminder of the volatile nature of stock investing, but on balance we view the pull back as invoking important discipline in the market. Consolidation at this stage allows for a more stable and consistent pace of growth as corporate earnings recover and eventually catch up to valuations. [1] Comparison of COVID daily statistics from opening (May 6) to most recent (June 4).While these looked at single day comparisons, it’s important to note that the three and seven day moving averages were similar. Arizona Department of Health COVID-19 Dashboard https://azdhs.gov/preparedness/epidemiology-disease-control/infectious-disease-epidemiology/covid-19/dashboards/index.php [2] https://www.worldometers.info/coronavirus/country/us/ |
