The second quarter GDP number came out this week and it was the worst on record, contracting -32% on an annualized basis. The projection for the third quarter is now estimated at +18%, which we expect will be one of the best on record. We have been saying since March the data in the short run will look horrific, but the upswing will likely be equally dramatic. However, the shape of the recovery continues to remain dependent on the path of the virus..
The probability for a successful vaccine, perhaps as early as the end of this year, remains high given current developments. A study out this week by the National Institute of Health (NIH) regarding the Moderna vaccine brought further welcome news on that front.[1] In addition, the FDA is about to approve emergency use of antigen treatments from the blood plasma of recovered patients, which is anticipated to open the way for one of the most promising treatments for COVID-19 patients.
Here in the U.S., despite increasing cases, we continue to see the level of hospitalization and ICU utilization remain well within capacity limits. Cases in the Sunbelt appear to be leveling off. As of the most recent CDC report (see table below) only 8% of hospital capacity is estimated to be COVID-19 related (about 64,500 patients), and total unused capacity for both hospital beds and ICUs is about 40% (approximately 320,000 inpatient and 50,000 ICU beds). As we have noted before, from the point of view of the markets, it is not the headline number of cases that is the issue, but rather the hospital utilization numbers and mortality rates.
| Estimates[2] | Number | Percentage |
| Inpatient Beds Occupied (all Patients) | 504,432 | 63% |
| Inpatient Beds Occupied (COVID-19 patients) | 64,496 | 8% |
| ICU Beds Occupied (all patients) | 75,257 | 61% |
So, we ask the question this week: at what level would new daily case counts overwhelm the hospital system? Given the ratio of hospitalization to current cases is about 3% nationally, and the average hospital duration is 11 days, we can impute the maximum daily case level from current available capacity figures noted above. Based on the hospitalization rate, cases could surge another 11 million before we would hit capacity from the current base of 2.3 million, representing a growth rate of 500%. Factoring in hospital stay duration results in the following: 11 million total cases divided by 11 days = 1 million new cases per day.
The Institute for Health Metrics and Evaluation (IMHE) current projection of daily infections at current levels of social distancing projects daily infection rates of 115,000 (the seven-day average is closer to 66,700), a number they forecast declining into October. In contrast, the worst-case, upper end of their projections, assuming continued easing of restrictions, is 317,000 per day, or less than a third of our estimated maximum daily threshold. Short of a complete abandonment of any social distancing policies or practices, this level of new daily cases is unlikely to be realized.[3]
Why is this important? Business restrictions and consumer activity will remain sensitive to these factors, and so as long as the medical sector can handle caseloads and the need for further shutdowns or greater restrictions lessens, the path of the economic recovery will continue. To the extent that hospitalization and mortality metrics improve through better treatments, the sharper the “V”, as shown in the figure below. The steeper the recovery, the better performance from equities, particularly across the many sectors that have lagged information technology this year.
Markets and the Next Stimulus Package
For now, equity markets appear to be in a period of consolidation, although still up since the end of the quarter, as Congress determines the next fiscal stimulus package. With the additional $600 per week unemployment benefits set to expire today, Congress has been pushing forward on a plan to extend those benefits, albeit at potentially reduced levels.
The municipal market is anticipating that some portion of the bill will bring relief to current budget shorfalls. Since the May 12 HEROES act, the municipal market AAA scale has rallied by almost 50 basis points (0.50%). Democrats have proposed an additional $1 trillion of support, and the Republican side has proposed no support. Wall Street is estimating that they will compromise and settle around $400-500 billion of support for states and cities.
The NY transportation system, one of the largest municipal issuers, recently stated that they need an additional $3.9 billion to keep operating through the end of the year or it will be forced to implement severe cuts in order to meet the transportation needs of the city. In the meantime, numerous states have enacted temporary spending plans with the belief they will receive additional government support.
The Fed met this week and announced no adjustments to current interest rate policy beyond their intention to remain extremely supportive through 2022. The Fed also announced they will extend emergency lending programs by three months until year end. All but one of the nine programs was set to expire. These programs serve as a lender-of-last-resort and help support the lending function of the corporate and municipal markets.
[1] https://www.nih.gov/news-events/news-releases/phase-3-clinical-trial-investigational-vaccine-covid-19-begins
[2] As of most recent data available, July 13, 2020 https://www.cdc.gov/nhsn/covid19/report-patient-impact.html
[3] Sources: IMHE, Center for Disease Control (CDC), Worldometer
