“…it was the spring of hope, it was the winter of despair….we had everything before us, we had nothing before us…” – Charles Dickens, A Tale of Two Cities
Just prior to the arrival of the pandemic, our financial system was operating at a high level. The economy and the markets were humming, prices were up, and optimism ran high. Then, the pandemic hit. An unprepared national public health response led to a confused, patchwork effort to avoid contagion and prevent an overwhelmed healthcare system by slowing down nonessential economic activity. In that chaotic environment, the market responded with a fit of panic, plunging in value by 34% in March.
As the second quarter began, there was widespread agitation that the closing of the economy would lead to financial disaster, and arguments about the relative value of saving lives. It was a dark time. At the same moment, the federal government raced to bring in monetary and fiscal relief, increase unemployment payments, support small businesses, and fund states and municipalities. These things were intended to bridge the period needed to stamp out the virus until the economy could operate more fully again.
Have We Really Recovered?
Visions of a brighter future returned investors’ confidence, and markets recovered much of their initial price declines over April and May. In contrast, June has seen some significant volatility, but markets ended the month roughly unchanged from where they began. Year to date through June 30, the S&P 500 was down roughly 4%, with much of the price recovery driven by a few very large tech companies. Smaller US companies, measured by the S&P 600 index, were down about 18%, and international stocks, measured by the EAFE index, were down roughly 12%. All of these are well above their March lows. But do they reflect the reality of the current situation?
Markets generally move in advance of economic data, declining before we know the extent of a slowdown during a recession, and rising again before economic recovery can be documented. Tools for assessing our national economy can only look backward, even as the stock markets look forward. In the first quarter, GDP was down -4.8% and measured only the very beginning of economic slowdown from shelter-in-place orders that began in the second half of March.
The second quarter took the brunt of economic decline, during which there continued to be a tense struggle about whether to prioritize the economy or public health. With the quarter complete, economists now estimate that economic activity declined by -35% for the three months ending June 30.1 While shutdowns hit hard in many areas, coronavirus numbers started declining, and the reopening of the economy commenced in the second half of the quarter. New York, the first COVID hotspot, was able to begin reopening in May once the rate of new cases was under control. Other geographies, particularly in the South and West, were eager to follow suit, and in June many restrictions on business activity were lifted.
As virus cases began to slow, economic data leapt in a positive direction in May and June, supporting efforts to get people back to work and to allow businesses to begin reopening. Optimism returned. Families gathered, outdoor dining expanded, and church services began. During this period, there was also an increasing sense of dread that opening the economy — which after huge economic hardship is agreed to be essential — would lead to coronavirus cases surging again. Sadly, the data over the last week confirm this to be true, and we are circling back again to more restrictive management of business activity and gatherings, and a slower pace of opening
Pandemic Economics 101: Wear a Mask
We find ourselves now at the beginning of the third quarter of the calendar year, no longer solely focused on either containing the virus or on restarting economic activity. We are finally trying to do both. This is a new phase of coordination and management, an effort to realistically negotiate the much more complex situation of economic activity embedded in a pandemic. Economic opening has proceeded quickly, but this week many states and counties have adjusted their plans based on current virus activity; they are starting to coordinate the essential need for economic activity with the demand for public safety.
At the heart of this coordination are functional, widespread practices that can allow economic activity to continue, and the critical practice is wearing facemasks. Goldman Sachs recently calculated that a national mandate to wear face masks would dramatically support economic recovery activity: “A face mask mandate could potentially substitute for lockdowns that would otherwise subtract nearly 5% from GDP.”2
From a public health perspective, wearing a mask reduces virus transmission, reduces cases, and saves lives. There are currently only 20 states and the District of Columbia that have comprehensive mask requirements in all public places where social distancing isn’t possible. The Goldman Sachs report found that cumulative COVID cases grow 17.3% per week without a mask mandate, but only 7.3% with one. The conclusion is clear: we can have an economy that hums with activity again, but only if we protect ourselves and one another with a mask mandate.
A Practical Fashion
Whether those GDP recovery numbers cited earlier come to pass will depend on our ability to control virus transmission by reducing the transmission rate. The Goldman study found that with a national mandate to wear masks, the daily growth rate of confirmed cases could be reduced from 1.6% to 0.6%, until we have an effective vaccine. The mask is the tool that supports public health and the economy at the same time.
We expect that in the upcoming months, the market will reflect the dual understanding that both economy and health are essential, and move up and down with the changes in regulations and virus rates. We expect continued volatility and uncertainty about the pace and direction of recovery. Despite the necessary zigzagging, a strong economy has the potential to favor our health; a national mandate to wear masks in public favors the economy.
A commitment of citizens across the board to protect themselves and one another will support sustainable economic growth, and the horizon of opportunity that investors are always seeking will come into being because we wear our masks.
This is a general assessment of client portfolios and does not reflect the specific circumstance of every client.
1 Atlanta Fed GDPNow Estimate for 2020: Q2, Federal Reserve Bank of Atlanta, July 1 2020.
2 Janet Nguyen, “Wearing masks could prevent a 5% loss in GDP, Goldman says,” Marketplace, June 30, 2020.
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