What follows is not going to be a thoughtful analysis on what we learned during a presidential candidate debate, as we learned very little. What follows is instead focused on what we do know: Namely an update on the pandemic, and an update on the economy.
With that, let us begin.
Where we stand with COVID-19
For purposes of brevity, let me summarize this following section as very little has changed. Absolute numbers are still quite high, and the growth rate of cases has fallen dramatically, but has recently steadied out. With that short lens in mind, the virus is not winning, and yet neither are we. We are, in the short term, coexisting.
As of Sept. 30, there are now more than 33 million people worldwide (~7.2 million in the United States) that have had confirmed COVID-19 infections.1 That is roughly half of 1 percent of the entire earth’s population (it is worth noting this simple math obviously invalidates any point about nearing herd immunity).
Unfortunately, as expected, we have now passed more than 1 million deaths worldwide, and more than 200,000 of those deaths have come from the United States.2
With that said, the growth of those cases (which I believe the market is focused on) continues to remain low and steady.
Back in March, when COVID-19 was spreading rapidly, case growth in the United States was growing by more than 30 percent per day, which was both terrifying and unsustainable. We, as a society, made changes, and growth rates fell to the mid-teens in April, down to 2 percent in June, and now, U.S. COVID-19 cases are growing at less than 0.6 percent per day (on average).3
Chart 1 demonstrates this graphically since the beginning of April.
Chart 1: COVID–19 United States Case Growth Rate (since April 1)4
The growth rate was very high in early April, then fell very quickly, then rebounded a bit toward the beginning of July (as growth in the South exploded) and now continues to find all-time lows (roughly 0.59 percent on a five-day smoothed basis, coincidentally the same as the update mid-September). It is at least somewhat reassuring to see the growth rate hasn’t changed despite so many re-openings (schools, sports, and the like), although it is still very early to declare this will continue.
Chart 2 takes the very same data and converts it to the number of days to double the cases in the United States. I continue to find this is a more intuitive way to understand how fast cases are changing.
Chart 2: United States: Number of Days to Double Confirmed Cases5
The chart largely follows the story of the United States. In late March, the U.S. was in complete lockdown as case growth was largely out of control. At that point, the U.S. was doubling cases every three to five days. We learned, we evolved (and no, not quickly enough), but we nonetheless improved to late May and early June where we were doubling cases every 64 days.
The South then began to reopen, and many states pushed back entirely on some of the government guidelines. Growth rates increased again, and the days to double fell to 37 days on July 13.
Fortunately, the trend continues to improve.
The U.S. is now doubling cases roughly every 120 days and has maintained that growth rate for the past several weeks. This is clearly good news and is allowing us to co-exist with the virus and maintain some sense of normalcy (albeit the relationship is a fragile one).
Where the economy stands
We now turn to the more interesting segment of the update: the economy.
Just a few short months ago, we went through one of the most rapid and sharp contractions in economic history. The economy was, quite literally, shut down, and uncertainty and fear were rampant. The Federal Government printed a few trillion dollars, the Senate and Congress provided another several trillion dollars and the economy (unsurprisingly) began to stabilize.
Fast forward, and we are now in a fairly different situation.
To explore how different, I would like to use three lenses:
- Transportation Security Administration (TSA) passenger data — this should give us a sense of how much airline travel is back to normal.
- Housing prices — this will provide insight into a) how much pricing pressure there is, and b) whether Americans are feeling wealthier (as houses are often one of the largest assets they own).
- Retail sales — as the dominant driver of the economy over the past several decades, as goes the consumer goes the economy.
As we have all experienced, travel is, at least for the short term, remarkably different these days. Airline travel was essentially shut completely in March, and Los Angeles International Airport, for example, was operating at 3 percent of prior volumes.
Chart 3 and 4 show how that data has evolved.
Chart 3: United States: TSA Passengers per Day6
Chart 3 shows the number of passengers moving through TSA checkpoints (which are basically all U.S. airports) daily. The orange line is one year ago, and the blue line is today.
As mentioned, we witnessed an incredibly fast shutdown of the economy and all travel, and then a gradual reopening. We are now seeing daily travels remain steady at between 700,000 and 800,000 passengers per day.
Chart 4 shows the same data but depicts current traveler numbers as a percentage of the traveler numbers roughly one year ago (said another way, it is the blue line divided by the orange line). If there were similar number of passengers as a year ago, this would be 100 percent.
Chart 4: United States: TSA Passengers per Day (current / 1 year ago)7
The conclusion is largely the same. There was a remarkably fast shutdown, followed by a large jump in May and June, and it has been steady recently at roughly 30 percent of last year’s traveler throughput.
The U.S. Federal Reserve estimates that real estate is roughly 64 percent of Americans’ nonfinancial asset base.8 It tends to be an important barometer of how the economy is performing and how likely consumers are to continue borrowing and spending. In short, housing matters.
While there were significant deviations between different cities and states during the pandemic, in aggregate, real estate has held a very steady course. While not a perfect estimate, the Case-Shiller house index in Chart 5 demonstrates what has occurred since September 2000.
Chart 5: United States: Case Shiller Price Index9
The summary being that, on average, home prices have continued to appreciate. While ex-post attribution is always easier than prediction, declining interest rates continue to contribute by fueling buying and refinancing.
As a rough rule of thumb, the U.S. consumer accounts for roughly 70 percent of the U.S. economy. Accordingly, when the consumer stops spending, the economy stops growing.
Chart 6 shows not only how fast the consumer stopped spending, but how fast the consumer resumed spending during the pandemic.
Chart 6: United States: Adjusted Food and Retail Sales (Billions of USD)10
Chart 7 shows the exact same data, but simply converts the data to a 12-month percentage change. As is now well known, the contraction was both faster and more severe than the Global Financial Crisis in 2007-08, but the resumption was equally remarkable.
Chart 7: United States: 12-Month % Change in Adjusted Food and Retail Sales (Billions of USD)11
In closing, let’s take stock of what we have learned.
- Airline travel is still far lower than previous throughput and shows no sign of changing shortly. This likely means the airline industry will continue to need governmental support if it is to remain solvent.
- Real estate never really suffered and, in fact, largely benefited (on average). Rates are now lower than ever before and continue to fuel heavy borrowing.
- The consumer stopped spending and is now back to spending at levels similar to before the crisis.
From an economic perspective, therefore, the airline data is a negative, but the real estate and consumer data are both relatively positive. What does this mean? Will the economy continue to move higher? Are we through the crisis? Can we go back to (a new) normal?
The honest answer is that, in the short term, no one knows. What we do know is that, over the long term, markets are an extension of capitalism, and capitalism incentivizes productive behavior. I would also caution that there are clearly risks to the downside right now, and we must expect more volatility in the months to come while preparing accordingly.
Further, while these simplistic lenses are important, they are limited. Economies, and by extension markets, are complex, dynamic, and impossible to predict in the short term.
As such, we must pursue the only logical extension of that knowledge: resist the urge to act because of the short term. Stay the course. Control what can be controlled. Do not try to predict the election, and do not try to time the market. Both are difficult at best, and futile and loss-inducing at worst.
In short, save. Seek to minimize taxes and costs. Stay aware of your emotional reaction to market events only as a barometer for whether your portfolio is calibrated properly. Plan with your investment professional for the long term to ensure you meet the goals that are important to you.
And lastly, stay safe, and turn off the investment news channels. (Need a financial professional? Let us know)
And lastly, stay safe, and turn off the investment news channels.
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2 Source: Johns Hopkins University as of Sept. 30, 2020 https://www.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6
4 Sources: Bloomberg, World Health Organization as of Sept. 30, 2020
5 Sources: https://www.worldometers.info/coronavirus/country/us/, as of Sept. 30, 2020
6 Sources: https://www.tsa.gov/coronavirus/passenger-throughput, as of Sept. 30, 2020
7 Sources: Bloomberg, S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index (SPCSUSA Index), as of Sept. 30, 2020
9 Sources: Bloomberg, S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index (SPCSUSA Index), as of Sept. 30, 2020
11 Sources: https://www.tsa.gov/coronavirus/passenger-throughput, as of Sept. 30, 2020
12 Sources: Bloomberg, https://www.census.gov/retail/index.html, as of Sept. 30, 2020