Let’s review some recent news.
The market was down 7.12 percent between Monday and Thursday last week, then it was up 4.5 percent between last Thursday and yesterday (June 16).1 Prior to last Thursday’s selloff, the Standard & Poor’s 500 had recovered nearly 90 percent of its losses from previous highs, despite dire economic data.
The financial press attributed the selloffs to higher COVID-19 case counts, and a potential second wave. NBC News, for example, featured a headline stating “China reports highest coronavirus case rise for two months,” and the press seems to be generally attributing the selloff the rising COVID-19 cases.2
Then on June 16, U.S. retail sales broke a record for the largest monthly increase ever (higher than both the rebound following the global financial crisis and the one following the dot-com bubble crisis). Anecdotally we hear that cases are falling in one part of the count but increasing in another.
Confused yet? Is exhaustion setting in?
Our circumstances are indeed both confusing and exhausting.
Data is volatile, the markets are chaotic, policymakers are scrambling, businesses are holding back, and consumers are gingerly beginning to re-introduce themselves to the outside world.
With that unsettling beginning, let us try to provide some perspective as we attempt again to separate fact from fiction. The first rule of thumb when in the midst of chaos is to breathe, and the second is to “zoom out”…we will try to do both.
First and foremost, we will look at the data on COVID-19 cases and growth and, second, we’ll explore the latest findings on how the economy is changing.
With that, let us begin.
As of the morning of June 16:3
- The novel coronavirus (COVID-19) has infected more than 8 million people and killed more than 438,000 people worldwide.4
- In the United States, there are now more than 2.1 million confirmed cases along with more than 116,000 deaths , and 30,800 deaths occurring in New York alone.5
- Brazil is now second behind the United States with roughly 44,000 deaths, followed by the U.K. with 42,000 deaths, and France with 29,000.
Each time I write those numbers I admit I double-check that I got them right. As a student of history, I find them staggering, tragic, and frightening.
For comparison, the global death count is now higher than the roughly 407,000 U.S. soldiers killed in World War II.6 The global death count now also is approaching the roughly 600,000 U.S. soldiers killed in the Civil War, the deadliest period in U.S. history.
And yet, throughout these market updates, I have contended that as our knowledge has grown, the uncertainty appears to have decreased, and markets have responded as the growth rates of cases have slowed. With re-openings occurring throughout the country, it is therefore important to continue to review the data with an objective eye towards what is occurring.
Chart 1 helps to clarify that picture by showing both the absolute numbers and the changes.
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.8 Today, those growth rates are consistently around 1 percent per day.8
Perhaps more intuitively, we can use those growth rates to calculate how long it takes for global case numbers to double.
In the middle of March, for example, global cases were doubling every four days. At that growth rate, if you start with 100,000 cases today, in four days, we would have had 200,000 cases. Today, given the low growth rate, we are now doubling the global number of cases every 55 days—clearly a tremendous improvement. This doesn’t mean there aren’t flare-ups or problem areas, it simply means that, in aggregate, globally we are better off this week than last week, and this month than last month, and the trend continues to improve as we learn more.
Within the U.S., in aggregate, the picture similarly continues to improve. On March 21, the U.S. growth rate was 40 percent. As of June 16, it is now hovering consistently around 1 percent.9 One month ago, the number of cases doubled every 1.8 days; today, the number of cases is doubling every 64 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 several months.
Clearly, the U.S. has made incredible progress and continues to do so. This is despite a gradual re-opening of the economy, and while there are flare-ups in a couple of areas (Texas and Oregon being two of the more prominent), in aggregate the U.S. growth rates continue to slow. This is great news that may not be generally reflected in daily headlines.
Therefore, we have established two important points:
- The growth of COVID-19 cases worldwide continues to slow.
- The growth of U.S. COVID-19 cases also continues to slow.
This is not my own perspective, or just idle speculation…these statements are derived directly from the data. Again, great news, and while I am not necessarily predicting continued slowing (I try to avoid speculation entirely), I remain very optimistic about the data we see.
With that, let us turn to the economic perspective, and in particular, the great bastion of economic growth in the United States: the consumer.
Roughly speaking, the U.S. consumer accounts for 70 percent of the U.S. economy. The consumer is vital and, over recent decades, the number one variable in explaining economic growth. Therefore, it is particularly useful to review how the behavior of U.S. consumers is changing as it gives important clues for how the economy will change.
First, let’s explore how the pandemic has changed travel.
Chart 3 demonstrates how dramatic the shutdown has been. has changed travel. Chart 3 demonstrates how dramatic the shutdown has been.
The orange line is the graphical representation of how many Americans were going through airports roughly one year ago. The blue line is the same data, but one year forward. In short, airports went from roughly 2.5 million people per day to fewer than 100,000.
The good news (from an economic perspective) is that as of yesterday, there were more than 500,000 people traveling through airports. But there is still a long way to go to return to normal. Perhaps a separate topic, but still important to note, a reasonable person could argue that travel has changed permanently in the near to medium term, and perhaps airline travel may never return to its previous throughput. Therefore, let’s zoom out further.
Chart 4 ignores how consumers have changed how they spend their money, and simply looks at how much they are spending on the aggregate of retail and food sales.
Calculated monthly by the Census Bureau, this measure is designed to calculate the sale of finished goods. Think of online buying, department store shopping, and restaurants as three primary examples. It’s a great indicator when thinking about the broad economy, because, again, the U.S. consumer has historically been such a significant component of the economy.
For context, the size of the U.S. economy in 2019 was roughly $21 trillion, and total 2019 retail sales were a bit more than $6 trillion. In short, it’s quite important.
There are two important points to notice:
- Retail sales fell faster than they have at any point in history,12 and
- Retail sales have recovered faster than at any point in history.12
Said another way, the U.S. consumer very quickly cut spending during the worst of the crisis and has now starting spending again. They aren’t back to recent levels yet, but they are moving there quickly.
Chart 5 shows the same data, but how it is changing on a 12-month basis.
Again, we’ve experienced the largest and fastest contraction in history, followed by the largest increase in history. Perhaps even more remarkably, they happened in just two short months.
From an investor’s perspective, what are we to make of our collective experience? What have we learned? How are we to benefit from the lessons at hand? To begin, let’s take stock of what we know.
1) On a global basis, we have experienced a tragic, confusing, and perilous time. Many lives have been lost, and we are not yet out of the crisis.
2) Capital markets reacted to the high levels of fear and uncertainty by selling off rapidly, and then subsequently reacted to the lower levels of fear and uncertainty by rising rapidly. Those that sold at the height of the crisis likely incurred significant losses.
3) Businesses responded to the crisis by freezing hiring, laying off workers and halting capital projects. Consumers responded to the crisis by staying home (mostly), and by halting spending (mostly). The U.S. government responded to the crisis by ensuring markets remained functional (driven by the Federal Reserve), and by providing enormous levels of relief and stimulus (driven by the Senate and Congress).
4) More records have been broken than I can count: fastest selloff, fastest rally, largest jump in volatility, largest drop in unemployment, largest rise in retail sales, etc., etc.
We, as a human race, have quite possibly just accomplished the largest self-induced shutdown in human history. We have done so to protect the most vulnerable among us and, in doing so, have likely saved hundreds of thousands of lives.
From a capital markets perspective, capitalism has continued to work. Right at this moment, hundreds of biotech companies and thousands of researchers are in a rush to find a vaccine. They do this because 1) a vaccine creates tremendous value in the world, and 2) those companies have tremendous incentives to do so. Incentives drive behavior, and capitalism, by extension, rewards ingenuity and solutions.
Therefore, I would summarize our lessons as:
- Planning trumps timing—Never count on timing the market. Even the most seasoned professionals don’t do it well, and that leaves everyone else with a negative expected value.
- Asset allocation matters—Maintaining a thoughtful and diversified portfolio can help create the highest likelihood of reaching your goals. Not only can it help generate positive expected returns (if done well), but it increases the probability of sticking with your portfolio during the most difficult times because the diversification is designed to help dampen the extremes.
- Control what can be controlled—Consider keeping costs down, minimizing taxes and being thoughtful about risk tolerance. We cannot control the current crisis, and we won’t be able to control the next crisis. As such, focus on what can be controlled, and rely on capitalism to help generate higher returns than inflation over the long term. Stay focused on your long-term objectives rather the short term…the short term is both confusing and perilous.
In closing, stay safe, stay calm, and please turn off the financial news channels.
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