It is not an overstatement to suggest that the events of the next few weeks are a global inflection point of tremendous magnitude. Have we seen the worst of this pandemic, or will a resurgence of hospitalizations, lockdowns, and deaths occur as outdoor activity becomes increasingly less appealing and people inevitably congregate for the holidays? Will a safe and effective vaccine be announced before the end of the year, and will enough people be willing to take it as it becomes available in the Spring? Will it ultimately be known as the pandemic of 2020, or the pandemic of the 2020’s? Will a second stimulus package get passed and injected into the economy before it is too late, or will Congress fail to rise to the occasion as we enter the lower swing of a double-dip recession? Oh, and there is an election next week that may have a long-rippling consequence or two.
On the virus front, the numbers are not trending in the right direction. Lockdowns are being re-imposed in European countries that have embraced (tolerated) more government control, including in London, Paris, and Spain. In the US, it looks likely we will print our highest daily case numbers yet in the next week or two, perhaps by the time this is published (it was), and while we have certainly gotten better at treating the disease, the death toll lags cases and is now turning up. People have been quite resilient these last nine months, but clearly pandemic fatigue is setting in across the country. Do we have another year of this left in us?
Cases have hit new highs in the US, and despite a significant proportion of the official tally being due to increased testing, positivity rates are also on the rise in many states.
We have gotten much better at treating the disease, but deaths lag cases. Will we see a return to the numbers of the Spring as people spend more time indoors?
The good news is that thousands of the world’s smartest people are working diligently at bringing an end to Covid-19. Not just in direct vaccine development, but in manufacturing the infrastructure necessary to produce and deliver millions of doses. There are at least 33 vaccine candidates in production, and 11 in phase three clinical trials. The odds are good that one or more of these candidates will be ready for widespread distribution in the first half of next year.
But even if a vaccine is developed and widely available, another question arises: will enough people be willing to take it? A recent Gallup poll suggests perhaps not, as 50% of respondents said they wouldn’t take an FDA-approved, no-cost vaccine.
Economically, is hard to overstate just how important the CARES Act was to averting disaster this summer, but now the effects are wearing off and the pools of money that had been filled are drying up. Many folks did the right thing with the stimulus they received and saved it (those that could), but that is being sharply drawn down, as seen below in the chart of personal savings rates. The economy will not make it to a vaccine without further stimulus.
While we have regained almost half of the jobs that were initially lost, the rebound is highly industry dependent and based in significant part to cash reserves and government aid. Without another round of stimulus, many of those businesses that kept people employed with PPP money will not be able to keep them on much longer. Stories like this one below at the Strand bookstore in NYC will continue to play out across the country.
Even with government aid, more than 15,000 restaurants and 15,000 retail locations have permanently closed, while the airlines continue to burn millions of dollars every single day. Southwest Airlines surprised to the upside in their recent earnings call, only losing $20 million A DAY in the third quarter instead of the forecasted $23 million. This is clearly not a sustainable situation.
Despite all of this, there is the potential for a significant upside surprise. Perhaps our government can deliver the aid the economy desperately needs, perhaps an effective vaccine will be announced and distributed in Q1 next year, and perhaps our political situation will be less chaotic than the pundits have forecasted they will be.
Recency bias is a powerful psychological force, and we tend to think things will remain as they are. 2020 has been a struggle by just about every measure. 2021 doesn’t necessarily have to be.
Zachary S. Mineur, CFA
Chief Investment Officer
Independence Square Advisors