There is no playbook for equities in a pandemic. The sudden stoppage to the economy (aka "heart attack") coupled with dislocations across asset markets (is this due to systematic unwinds?) and the collapse in oil have made equity markets merely a residual calculation of sentiment and perhaps a "liquidity reservoir" (whatever participants cannot accomplish in other assets classes, they accomplish in equity markets). But financial markets are focused on multiple fronts on COVID-19:
(i) rapid spread in the developed world
(ii) financial implications of the "heart attack" on the economy
(iii) lasting social risks post-COVID-19
POINT #1: ECONOMIC HEART ATTACK IMMEDIATELY AFFECTS 26MM JOBS OR 17% OF LABOR FORCE
We have already seen estimates for US GDP for 2Q, and the reality is the economy suffered a sudden stoppage. This will produce some completely incomprehensible economic data. Jobless claims next week are likely to soar to 1mm-3mm or worse, which far exceeds those seen during 2008 and way above the 200k seen for most of 2019-2020. This is not a distortion, social distancing and fear have caused many service businesses to see a sudden stop.
Think about that for a moment, if service businesses see a sudden drop in customer interactions and traffic, they will naturally cut back. These businesses operate on low margins and labor is a high variable cost. In the past, we wrote about how some of these companies have a market cap of $79,000 per employee. Clearly, highly labor-intensive companies.
--Taking a look at the BLS report, there are 26 million people working in these service sector industries.
--If there is a 5% layoff rate, this would result in 1.3 million job losses.
Realize, this is the "one-time" response to the sudden stoppage and presumably, in a return to normal, many of these jobs are recovered.
POINT #2: FOCUS ON ITALY NEW HOSPITALIZATIONS AND SWAB RATES
Our clients seem to be focused on Italy as the template for the risks to the US. And as shown below, for the most part, the US is following Italy with a two-week lag. Granted, the mortality rates are significantly low. For instance, the state of NY has the highest number of cases (per Johns Hopkins) but the total number of reported deaths is 34 vs 233 for Italy with the same case count.
But the fact is that investors seem to be using Italy as the template and if such is the case, the "peak" in new cases for Italy will be an important benchmark. After all, if cases reach a "peak" in Italy, then the local models for the US would simply follow by two weeks.
Italy's case count is still rising and has not peaked...
The bad news is that the case count for Italy is still rising. As of the latest update, the number of new cases is 4,670. This means the US is at least 2 weeks away from a local peak (assuming Italy is 2 weeks ahead). Of course, there are differences between the US and Italy. Among them:
- time of social distancing initiatives
- age of the population (Italy older)
- social structure (number of family members per household, etc).
- The US is late to testing, so the number of cases is rising quickly, but likely reflecting the fact that testing is so far behind.
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