Market volatility, COVID-19, and Georgia’s lead

For this week’s update on the market situation surrounding the COVID-19 crisis, we are going to look to the great state of Georgia.

Why, you might ask?

Well, Georgia has given us a very helpful 32 days of insight into potentially what may come. Its shelter-at-home orders expired on May 1, and its mobility has subsequently increased (although it is still not back to normal).

As such, what follows is an update on the novel coronavirus (COVID-19) with a particularly deep dive into Georgia, followed by an update on the markets.

By way of summary, as to the former, we continue to make great strides to slowing the growth of the pandemic, and as to the latter, the markets have seemingly forgotten anything resembling a crisis has occurred, and are nearly back to the original peak levels set in February.

With that, let us begin.

The COVID-19 situation

As of the morning of June 1:¹

1. The novel coronavirus (COVID-19) has infected more than 6.2 million people and killed more than 372,000 people worldwide.²
2. In the United States, there are now more than 1.7 million confirmed cases along with a more than 100,000 deaths, with 29,700 deaths occurring in New York alone.³
3. The U.K. now has 39,000 deaths, Italy has 33,000, while Spain, France and Brazil have roughly 28,000 deaths each.²

Those numbers are both staggering and tragic. There is a reason they have dominated the headlines and garnered so much of our daily attention.

Yet they also are changing and, to underline that further, they are changing despite a gradual re-opening.

Chart 1 helps to demonstrate both the absolute numbers (which are frightening), and the changes (which are encouraging).

The blue lines demonstrate the total number of cases around the world and correspond with the left axis. The grey line demonstrates how the number of cases is growing and corresponds with the right axis. On March 22, growth rates were roughly 20 percent per day.⁵ As of June 1, those growth rates are now consistently under 1 percent per day.⁵

Over the last two weeks, the global growth rate has been cut in half and the number of cases is now down to doubling every 51 days. (Note. astute readers also may notice a slight uptick in the grey line in the most recent days. This comes from a single day increase on May 27, which we are watching closely to see if there is any meaningful change over the days to come).

Within the United States, the picture continues to stabilize further. On March 21, the U.S. growth rate was 40 percent. As of June 1, it is now hovering consistently around 1 percent.⁶ One month ago, the number of cases doubled every 1.8 days; today, the number of cases is doubling every 57 days.

Chart 2 (perhaps my favorite chart right now) puts those growth numbers in context by showing how the number of days to double has changed over the past two months.

Clearly, this is great progress and has saved thousands of lives. The impact of the slowdown cannot be overstated. It relieves pressure on our healthcare systems, it saves lives, and it continues to slow the transmission rate.

The Georgia guide

And yet, what is to happen next? Will this continue to decline into oblivion, or will we see a re-emergence as the country (and world) re-opens? While I don’t pretend to know the answer, perhaps Georgia can offer a helpful perspective.

Before we review the data, let us review what has taken place in Georgia thus far:

• March 18: Educational facilities were closed.
• March 24: Gathering restrictions were put in place.
• March 24: Businesses were closed.
• April 3: Stay at home order was implemented.
• May 1: Stay at home order EXPIRED.

Accordingly, that information can be used to model the mobility of the average Georgian. By and large, that change in mobility resembles other states, with the significant difference being that, as of May 1, the stay at home order expired, and mobility restrictions were greatly relaxed. Chart 3 represents that dynamic.

It is important to note that mobility has not yet returned to normal, and therefore our lessons should be tempered. Nonetheless, mobility has clearly improved, and we begin to therefore review how testing and infections have changed.

First, let’s explore testing. As companies have begun producing greater supplies of testing kits, and as states have improved their capacity to test, it follows that more individuals are tested. In Georgia, for example, there are now nearly 20,000 tests conducted per day. Chart 4 reflects that dynamic.

It would therefore follow that we should see a similar increase in the number of infections. In other words, if we start with the assumption that the virus is spreading at a steady rate (or even decreasing rate), as more tests are conducted, we would expect more confirmed infections. Fortunately, that isn’t the case.

Simultaneously we have instead seen a) Georgia begin to return to normalcy, b) daily testing has expanded significantly, and c) the rate of growth of cases has slowed.

Like Chart 1, the blue line corresponds with the left axis, and represents the total number of confirmed cases. The grey line corresponds to the right axis and represents the daily growth rate of confirmed cases.

On May 1, when the shelter at home order expired, there were roughly 27,000 confirmed cases in Georgia, and the number of cases was growing at roughly 3.2 percent per day.

As of June 1, there are now 45,000 cases, and the number of cases is now growing at 1.4 percent per day.

In short, Georgia has begun to re-open, testing has increased, and yet the growth rate has slowed.

The two main questions are why, and should we expect this elsewhere? The answer to both is unclear.

On the former, it is clearly a combination of increased awareness and knowledge, along with more social distancing, more disciplined quarantining, better methods for protecting vulnerable populations, warmer weather, and a handful of other items. The attribution among them is being measured concurrently, and we continue to learn more daily about what helps and what doesn’t.

As to the latter question, at a minimum, this gives us reason to be optimistic. Will we see a fall resurgence? I don’t know. Will we see isolated hotspots? Yes, we could. Does this mean the crisis is over? No, I don’t believe so…but the market seems to think differently.

The market stance

This then brings us to our final topic of this update.

Here are a few statistics that might surprise you:¹¹

• During May, the Standard & Poor’s 500 (S&P 500) returned +4.5 percent.¹¹
• During April, the S&P 500 returned +12.7 percent.¹¹
• Since the high (February 19), the market has returned -10.1 percent.¹¹
• And for 2020 to date, as painful as it has felt, the S&P 500 is now down only 5.7 percent.¹¹

In short, the market has reviewed this pandemic so far and is essentially signaling its indifference. At the depth of the sell-off, U.S. markets had lost nearly $12 trillion, and yet here we are, nearly back to even.

Therefore, from an investor’s perspective, what are we to make of our collective experience? We clearly have faced days and weeks of terror, and yet, calmer heads have (thus far) come out the other side intact. I believe there are several important lessons to consider:

1. Capital markets (as an extension of capitalism) are wonderful generators of returns in the long term but are often confusing and irrational in the short term. Forgive me for hijacking Winston Churchill, but “capitalism is the worst form, except for all the others.”
2. Accordingly, we must learn to ignore the short term. Unless we believe a system is broken, we must see dislocations and sell-offs as simply part of the capitalistic process of incorporating new information and adjusting to new expectations.
3. Significant dislocations are often opportunities for quality companies to thrive. Those companies that are more efficient, more productive, and have made better personnel and capital decisions will often pick up market share during these difficult environments. That process is both necessary and healthy.

More tactically, it is important to note that I still believe there is material risk to the downside right now. Please prepare for more volatility. While there are many data items that are both encouraging and optimistic, there is much that we don’t yet know.

While what we have done has been successful in slowing the outbreak and allowing capital markets to function, we are not yet out of the woods. Now is the time to take stock of what lessons we have learned and continue to stay focused on what can be controlled.

In closing, stay safe, stay calm, and please turn off the financial news channels.

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