While it’s true that visibility into corporate profits is virtually zero right now (as evidenced by the number of companies altering or withdrawing guidance), it’s important not to lose track of the fact that, once there’s concrete evidence of the coronavirus having peaked, market participants will be left to ponder the ramifications of an explosive policy mix.
Multi-trillion dollar fiscal stimulus paired with unprecedented monetary accommodation would be rocket fuel in an environment where demand begins to recover as economies restart and life begins to normalize.
Markets will obviously price this ahead of time, which suggests that on days when the pandemic news flow is incrementally positive, risk assets will be prone to sharp rallies, especially as shorts are covered, cash moves out of government money market funds and systematic re-leveraging begins as volatility normalizes. On Monday, for example, US equities rose more than 7%.
As documented in “Bear In A Bull Suit“, the public health crisis in New York, while still acute on any definition, appears to be exhibiting signs of improvement.
Specifically, hospitalizations rose just 2% over the previous day, marking three days in a row of single-digit growth, a far cry from the 20-30% that prevailed previously.
This is consistent with a projection tentatively put forward by JPMorgan’s Marko Kolanovic weeks ago, a forecast he then refined and advanced more forcefully last week. On Sunday, I discussed this at length in “How Marko Kolanovic Would Use Big Data To Save The World In Future Pandemics“.
Well, on Monday afternoon, Kolanovic reiterates that his models have consistently suggested that “social distancing is working and the apex of the pandemic will come sooner and require significantly less peak hospitalizations than projected by the models [initially] used by government officials”.
The official data out of New York now seems to be on the cusp of confirming those projections.
If you’ve followed Marko’s approach to modeling this, you might be inclined to suggest that when it comes to projecting hospitalizations and total cases, it would be better to err on the side of caution – “better safe than sorry”, so to speak.
In fact, Kolanovic says, utilizing a big data approach would have made the US far safer by providing for more accurate estimations of where to ramp up and deploy scarce resources.
“Big data indicated very early on that social distancing is working overall, but in some regions much better than others”, he writes, adding that “overall, nationally influenza-like illnesses now are suppressed by an extraordinary 80% from expected levels, [but] in some areas the decline has been modest and in other areas the decline has been in excess of 95%”.
This divergence means that hospitals outside of so-called “hot spots” are underutilized, while those in the hard-hit areas are overwhelmed. For Kolanovic, a big data approach to modeling would have at least ameliorated some of the strain in the hot zones. Here’s how:
A traditional model would prompt ramping up capacity on every location, in many places to unnecessary levels, thus wasting the precious and limited resources (e.g. ramping up to peak hospital bed forecast). More granular and timely models based on big data would be able to identify COVID hotspots, and would focus on creating a national or state-wide mobility task force, that can quickly shift medical devices and personnel from places where they are not needed to places where they are critically needed.
Using the same Kinsa data from his last two notes, Marko observes that in some areas of the country, social distancing efforts have resulted in as much as 95% declines in the incidence of atypical influenza-like illnesses (note again that the data used in the chart cannot say, specifically, whether a given increase/decrease is due solely to COVID-19, but it seems evident that the regional trends reflect both the spread of the virus and the efficacy of social distancing measures).
(JPMorgan)
Nationally, the real-time state of atypical influenza-like illnesses is near 77% below the seasonally-adjusted expected rate, based on an analysis of the Kinsa data.
How about New York? Well, here’s Marko with the details:
For the first time since the start of the outbreak, NY levels have dropped below the average expected level (12% below). The slow decline of NY illnesses is likely a result of a very big initial hit and limitations on how quickly distancing measures can work in dense urban areas dependent on public transport (e.g. subways, elevators, etc.). The trend is nonetheless encouraging and increases our conviction that the apex in NYS is likely behind us.
From there, he breaks down the progression of COVID-19 into four stages, generally defined by i) an exponential rise in cases, the implementation of lockdown protocol, peak case growth followed by an apex in the growth rate of fatalities; ii) a rapid decline in new infections, accompanied by a much slower tapering of new deaths; iii) a rapid drop in the rate of new fatalities; and iv) near total recovery.
Only China is past the third stage, Marko says.
All of this naturally raises the question of whether it’s possible to predict when the major developed economies will pass through each of the stages on the way to full recovery. Kolanovic endeavors to do just that. Here are the projected dates:
(JPMorgan)
What I would reiterate is that trillions in stimulus won’t simply be pulled back once the virus is under control.
That is, the Fed isn’t going to cancel all of the various liquidity facilities and asset purchase programs put in place over the past six weeks if the spread of the virus slows. That bid (which is now unlimited in scope) will be in the market for the foreseeable future, and now it includes spread products.
Similarly, fiscal stimulus measures are being implemented rapidly. 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 combating an epidemic.
You can draw your own conclusions, but the bottom line is that when the virus is gone, the stimulus will still be in the market, and it’s entirely possible that a fourth fiscal package is coming in the US, irrespective of the evolution of COVID-19.
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