Advisor Talking Points: Cheer Up – Investors Keep Their Eyes On The Big Picture
Fears of a resurgence of the Covid-19 virus are dominating the news and causing stock market volatility. The spike in new cases needs to be watched and responded to, but the original lockdowns were never going to eliminate the virus short of completely unacceptable economic pain.
The sad truth is that Americans are going to have to learn to live with this virus until there is a vaccine, which means quickly stamping out spikes in new cases, as well as a lot more individual responsibility.
Since the Memorial Day reopening of many American businesses, new Coronavirus cases have spiked up in almost half of the states. There are two primary reasons for these increases in new infections.
First, there has been a massive increase in new testing. In March, because of the lack of tests and testing equipment, it was near impossible to get a Covid-19 test unless you were admitted to a hospital with symptoms. Now, testing is widely available, and we are seeing people testing positive that have mild or no symptoms. These new individuals are mainly younger and were always out there, but further widespread testing has identified many more infected people with symptoms not requiring hospitalization.
Second, we see a significant increase in community transmission because of a reckless lack of social distancing and a reluctance to wear face masks.
Because of testing and contact tracing, in Texas and Florida most of the new community transmissions are being traced to bars, private parties and large gatherings where there was no social distancing. Almost all of the new infections in one county in Texas came from weekend river rafting drinking parties. That is why Texas and Florida are closing all bars, beaches, and large gatherings over the Fourth of July.
It May Not Be As Bad As The Press Is Reporting
According to an insightful article in The Wall Street Journal last week, “more spread was inevitable once states started to relax their lockdowns, and that is going to continue until a vaccine exists. But the spread also needs to be put in context. New York City had about 12 times more Covid-19 patients per capita in intensive-care units at the peak of its hospital surge in April than California does today, six times more than Miami-Dade, five times more than Arizona, and four times more than Harris County.
New York City and other hard-hit parts of the Northeast experienced bigger outbreaks in the spring, which were slow to recede even with strict lockdowns as the virus spread through nursing homes and public housing. Two months after locking down, New York City still had many more Covid-19 patients in intensive care than most new hot spots do today.
Elderly patients typically require more acute care and spend more time in the hospital, and the good news is that the hospitalized cases now are younger and, on average, less severe. The chief operating officer of Tenet Healthcare, which runs hospitals in Sun Belt states, told investors last week that “the length of stay on [recent] cases is lower, the resource consumption is lower.”
Most hot spots currently have ample health-care capacity, though some hospitals are stretched. Miami-Dade County has about 1,000 ICU beds available for a surge, more than five times the number of Covid-19 patients in intensive care. Harris County has approximately 455 ICU beds available, about as many as are currently occupied by Covid-19 patients.
Public health officials worry about an exponential rise in cases—that’s their job. But political leaders have to consider overall public and economic health, and locking down again doesn’t seem justified by the evidence.
Florida and Texas began reopening more than a month before hospitalizations started surging. Health officials in Arizona have linked flare-ups to specific events or places such as large Hispanic holiday gatherings and Indian reservations. Cases on Indian reservations and in rural counties along the Mexican border are four to five times higher per capita than around Tucson and Phoenix. These can be monitored and contained.
Some clusters have been tied to bars and churches, and political leaders should do more to warn about social distancing and to use masks. But states like Wisconsin and Iowa that have been open for several weeks have recorded only a slight or no uptick in hospitalizations. Locking down again won’t stop family gatherings in homes or essential workers who return home to spread the virus to families.
In any case, the health, social, and economic costs of shutting down the economy again are too high. Twenty-one million Americans are unemployed. Countless businesses and livelihoods have been destroyed. Rhode Island reported this week that drug overdose deaths spiked 22% in the first three months of this year.
A new study in the Journal of the American Medical Association finds that the number of adults reporting symptoms of serious psychological distress rose to 13.6% from 3.9% in the same time in 2018, with higher levels among the young (24%), those with lower income (19.3%), and Hispanics (18.3%).”
Because many of the new Covid-19 cases are younger people, the New Deaths Rates are currently declining. But that decline could be reversed as younger people start infecting older, more at-risk Americans.
My prediction is that until we get a vaccine sometime next year, we are going to see a spike in new cases about three to four weeks after every holiday like the Fourth of July, Labor Day, Halloween, Thanksgiving, Christmas, New Year’s and Valentine’s Day 2021.
As these new cases and hospitalizations are reported in the news, fear will set in, and there will be short-term pullbacks in the stock market. We are going to see this over and over again. Get used to it!
What Will Be The Impact On The Economy?
After future spikes in new infections, states will close down bars and large gatherings, and the new cases of community transmission and hospitalizations will eventually go back to normal. There will probably be an increase somewhere after every future holiday.
The impact on the overall American economy will be negligible. Even if you closed down all the bars in the United States for a year, that would represent less than 1% of U.S. Gross Domestic Product (GDP). Closing down bars in a few cities, for a month or two, will have virtually no impact on the economy.
In the end, forget about all the political sloganeering and posturing. If you really care about the economy and you care about your investments and a volatile stock market—don’t be an idiot! Wear a mask and social distance! It’s not about you. It is about your community and the older and more vulnerable members of your family!
Stock Market Volatility: Investors Need To Distinguish Between “NOISE” and “ECONOMIC FUNDAMENTALS.”
When investors see the stock market go through volatile periods, I always ask them to distinguish whether the stock market volatility is caused by (1) political or foreign policy issues or just fear over what we don’t know or can’t predict or don’t understand about the Covid-19 pandemic—or (2) more serious underlying economic issues.
Investors always need to ask the question, “Does today’s “breaking news” change the outlook for the overall economy or corporate profits?”
Cheer Up! By Any Measure, The Economy Is Coming Back
With the economy reopening all over America, people are finally going back to work in Detroit and Atlanta and everywhere—even New York.
All the key leading economic indicators have turned up over the past four weeks. Construction is back, new home building permits hit record levels in May, shipping is increasing, overall unemployment is heading down, new car sales are going up, and retail sales increased 17.7% in May (economists expected 8%). Total consumer spending rose 8.8% in May. Consumer spending represents more than two-thirds of economic demand in the U.S. Manufacturing has come back, The Kansas City Federal Reserve Manufacturing Survey was higher in April than it was in December.
And lastly, Dr. Anthony Fauci believes we will have an effective vaccine for Covid-19 before the end of this year.
All of these are signs that the U.S. economy is lurching back to life.
If an issue or a generalized fear doesn’t affect the underlying U.S. economy or most people’s ability to work, investors should ignore the stock market volatility and not panic. When the stock market goes down because of generalized fears of what may happen, or some political or foreign policy issue, it is almost always a short-term correction if the problem does not affect the long-term economic fundamentals of the entire economy. Closing down bars in Houston and Miami doesn’t qualify as a major economic disaster—except if you live in Houston or Miami!
These stock market corrections and pullbacks usually last only a short time, and, when investors recognize that the issue does not impact the overall underlying economy, the market recovers quickly. In these situations, investors who panic and sell almost always lose money.
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Paul Dietrich is the Chief Investment Strategist for B. Riley Wealth Management. B. Riley Wealth Management offers comprehensive financial solutions to clients through its network of over 160 experienced financial advisors across 13 states. The firm manages more than $11 billion in client assets and serves approximately 34,000 client accounts.