Will The Reopening of the Economy Work?
The chains are coming off the U.S. economy this month. In the last few weeks, the most extreme measures—stay-at-home orders, business closures for non-essential services, have been lifted even if to varying degrees. Financial markets are already discounting this. Financial asset prices have rebounded dramatically, enjoying the benefits of the massive fiscal and monetary stimuli and buoyed by the raw animals spirits of an economy about to be unleashed.
The $6 trillion question though, is will it work?
Despite the loosening of business and social restrictions, these measures will only matter if cases of COVID-19 don’t suddenly skyrocket. The conventional wisdom these days is that the summer weather will do what no medicine has yet been able to do—the spread of the virus is expected to dramatically slow amid bright sunlight and higher humidity. There was also positive news out last night about antibodies—at least two studies are now suggesting that the presence of antibodies suggests a lower likelihood of future infection—huge, if true. Also interesting is a report produced by JP Morgan that the “rho”—effectively the rate of transmission—appears to be somehow lower in states that have already taken steps to reduce restrictions on business and social movement. I haven’t pored over this report, but if this were true, it would appear to lend support to the herd immunity theory.
On the other hand, there is the risk that by reopening the economy too quickly, we set the stage for disaster in the cooler months of the fall and winter. Schools could close again, and businesses large and small that were able to somehow survive the first wave of infection this spring will not be able to survive the second round, much less a third round. Many people seem to believe that the dampening of the curve shows that the disease is in the process of going away on its own instead of showing the success of mitigation. As a friend of mine says, it’s like containing a forest fire and then thinking nothing’s going to happen if you carry a torch to a different part of the forest.
The markets are back to pricing in a V-shaped recovery. It might be right. But wow, what an aggressive bet that has become in just a few weeks. In some ways, we are back to where we were in February. There is still every reason to believe we will eventually manage through this crisis. At the mere whiff of a vaccine, the markets are poised to power higher, but the veil of uncertainty regarding even second quarter earnings, let alone 2021 guidance, is perhaps the largest since the Great Financial Crisis.
Any opinions are those of Burke Koonce and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Burke Koonce is a financial advisor at Raymond James & Associates, Inc., member New York Stock Exchange, member SIPC.