“More often than not, the response evolves initially from under-reaction, then overreaction and then converges closer to an optimal response”, writes JPMorgan’s Marko Kolanovic, perhaps the most recognizable name among sellside analysts.
Kolanovic weighed in Tuesday afternoon, amid a vociferous debate on how best to confront the coronavirus, which worsened materially in New York over the past week.
The populace is divided, and the virus question has predictably devolved into a partisan feud, both among the public and on Capitol Hill, where lawmakers have spent the last several days hammering out a massive stimulus plan worth somewhere between $1 trillion and $2 trillion.
Around 1 in 4 Americans is living under some manner of shelter-in-place order.
Likely in response to increasingly dour forecasts emanating from Wall Street, Donald Trump has publicly come out in favor of relaxing protocols put in place to stop the spread, even as cases multiply in “hot spots”.
On Tuesday evening, just minutes after the president told reporters at the daily coronavirus briefing that he wants the economy back online by Easter, the White House recommended anyone who’s been to New York self-quarantine for 14 days. Such is the cognitive dissonance inherent in the the president’s Sophie’s choice.
The problem for Trump is clear: It’s an election year, and the visual below paints a bleak picture for Q2 (Bullard’s forecast is particular dour, but it seems to assume at least the partial implementation of his “National Pandemic Adjustment Period” strategy):
A recession appears inevitable, with the only question being whether the numbers will end up looking more like 2008 or more like 1930. This is the first time in the post-crisis era when the best-case scenario is for a GFC-style downturn.
Of course, abandoning containment protocols in a bid to blunt the economic damage comes with its own election year risk – namely that lots of people get sick, and some die. A Gallup poll released Tuesday showed 60% approve of Trump’s handling of the health crisis although the results were almost entirely split along partisan lines (94% of Republicans, 60% of independents, 27% of Democrats approve of his response).
“In responding to any crisis such as a virus pandemic or e.g. a threat of war, there is a trade-off society needs to make”, Kolanovic says, noting that society can:
- underreact – leading to catastrophic impact of a pandemic or being unprepared for a military aggression,
- overreact – and in the process cripple the economy/society or provoke an unnecessary war, or
- make an optimal response, that stops the crisis, while incurring calculated damage which is significantly smaller than in other two extreme outcomes
While this would be challenging for any president, it’s especially vexing for Trump, who’s facing the distinct possibility of heading into an election with the economy in a deep recession and his beloved stock market rally having totally evaporated.
The president has built his entire mythos on purported economic prowess and has taken credit for the equity rally more times than anyone can count. And while we all realize the current situation isn’t his fault in the first instance, he will be judged by voters on his response.
How to navigate this if you’re a market participant? Kolanovic looks at data from Kinsa Insights on the occurrence of atypical influenza-like illness across regions for clues.
First, a little background on this dataset from The New York Times:
Kinsa Health has sold or given away more than a million smart thermometers to households in which two million people reside, and thus can record fevers almost as soon as consumers experience them.
For the last few years, Kinsa’s interactive maps have accurately predicted the spread of flu around the United States about two weeks before the Centers for Disease Control and Prevention’s own surveillance tool, the weekly FluView tracker.
The thermometer data “acts as an early warning system for illness spreading,” said Inder Singh, the company’s founder. The C.D.C.’s system lags because it relies on weekly reports from hundreds of doctors’ offices and hospital emergency rooms about what symptoms they are seeing in patients.
The Times quotes Dr. William Schaffner, a professor of preventive medicine at Vanderbilt University. “This is very, very exciting”, he remarked, on March 18. “This is 21st-century disease surveillance, and we’ve been rooted in the mid-20th century with something very labor intensive”.
TechCrunch featured Kinsa in a piece published on Monday. “Even without the extraordinary circumstances presented by the global COVID-19 pandemic, what Kinsa [has] been able to accomplish is a major step forward in tech-enabled seasonal illness tracking and mitigation”, the article reads, in the course of flagging the company’s “atypical illness levels” map feature, which TC says “could prove an important leading indicator in shedding more light on the transmission of COVID-19 across the US– and the impact of key mitigation strategies like social distancing”.
“We believe that these types of alternative datasets are not just ingenious but extremely valuable as they contain real time information which can guide governments and citizens in their response to a pandemic”, Kolanovic goes on to say, in his Tuesday note, adding that while the real time data on the occurrence of illness “is not specific to COVID-19, statistically significant increases above the historical range (red dots in the figure) are likely driven by the COVID-19 pandemic”.
(JPMorgan, from Kinsa data)
This data may lead official data from hospitals by as many as 10 days, Marko estimates, and while, like Kinsa itself, he admits that “we cannot be sure that our interpretation of these data is correct”, it’s exceedingly possible that “they capture the main trends in the dynamic of COVID-19 spread and efficacy of implemented measures against the spreading of the disease”.
So, what’s in the above visual? Well, again, the red symbols represent readings significantly above the seasonal average. Here’s Marko:
If one looks at the data for San Francisco, one can see that an atypically high reading started about a week before the national reading, and were followed by the strong ‘shelter in place’ order about a week ago. Since then, the incidence of atypical illnesses plummeted and is now significantly below the seasonal average. This could likely be characterized as ‘overreaction’ as the influenza-like illness occurrence is now less than half of what would be expected normally. Miami-Dade county is likely an example of under-reaction.
If you look at the right-hand side of the chart, you can see that the last two national readings are below the seasonal average, having fallen from earlier this month, when the epidemic began showing up (and “showing up” is me extrapolating from the incidence of readings significantly above the seasonal average).
Kolanovic suggests that if this interpretation is correct, it indicates “an inflection of atypical iLI that occurred ~5 days ago in real time data”, which may presage a similar “inflection point in hospital cases” in just “a number of days, rather than number of weeks”.
That, in turn, would allow economic activity to restart within weeks, rather than months.
As for asset prices, the read-through is straightforward, assuming the above is valid. “Taking into account the unprecedented monetary and fiscal measures being implemented, as well as unprecedented asset declines over the past month, we maintain that asset price recovery is likely”, Marko says.
Remember, the Fed isn’t just going to cancel all of the various liquidity facilities and asset purchase programs put into place over the past three weeks if the spread of the virus slows. That support (i.e., that unlimited bid) will be in the market for the foreseeable future, and now it includes spread products and IG ETFs.
Similarly, fiscal stimulus measures will be implemented rapidly once Congress agrees on a final version of the enormous spending package. Once that money is spent, it’s spent, colloquially speaking. You can’t take the stimulus checks away from people, and you can’t repeal a bill aimed at combatting a deadly virus.
Given that – and considering exposure has been pared aggressively among many key investor cohorts, while volatility looks poised to subside just as an expected rebalancing flow “realizes” at month-/quarter-end – there is a plausible argument to be made that there’s a light at the end of this tunnel.
Remember, just days into 2019, while the majority of market participants were still reeling from the worst December for US equities since the Great Depression, Kolanovic said stocks would be back at record highs within months.
He was, of course, correct.
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