#Coronavirisk

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Today I share my perspective on the recent COVID-19 outbreaks as it relates to the national economy and the financial markets.

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Take a Breath

Some of you may know, I've been reluctant to get too worked up about the trends in the coronavirus from a market perspective, chalking-up the recent heightened awareness of the increase in infections to media hype and selective reporting.

Now, with Dr Fauci coming back on the scene and expressing concerns that "disturbing" data is showing an increase in community spread and saying he isn't expecting to see a typical summer slowdown in the virus, prudence says one should at least take notice.

With Texas repeatedly reporting record daily cases and new highs in hospitalizations, Gov Abbott has told citizens of his state to stay home unless entirely necessary. On Thursday, he halted elective surgeries in four counties and paused moving to new phases of reopening statewide. This morning, he ordered bars and taverns to close (except for take out). In the first rollback of its kind, Abbott also ordered restaurants to scale back capacity from 75% to 50%, starting on Monday.

Clearly, this will slow the recovery progress in his state. Frankly, he was probably a bit too aggressive on the reopening in the first place. Had he recognized sooner and ordered residents to adhere to the CDC guidelines on social distancing and masks, he may not be in this predicament.

Separately on Thursday, Florida Gov DeSantis said he has no plans to go to the next phase of opening in a state that has also seen an uptick in cases and hospitalizations. On Friday, he banned the consumption of alcohol on premises at bars.

While Pres Trump and Sec'y Mnuchin have said the U.S. economy will not be shut down again, state and local officials will make the call on the ground based on what they are seeing. In Texas, Abbott has said closing his state will remain the "last option." Florida's DeSantis has said he will not be shutting down again.

Media Selectivity

I'm still not terribly concerned with the developments on the virus. Several states (Texas, Florida, Arizona, CA) out of 50 have experienced renewed outbreaks that are putting strains on hospitals.

Houston, TX reported it reached 100% of ICU capacity on Friday. What doesn't get much media attention is that more than 70% of the hospital ICU beds in use are NOT from COVID-19 patients. In addition, the media rarely mentions that the surge capacity in Houston is another 870 ICU (empty) beds.

This doesn't take into account the ICU capacity ( normal and surge) in other cities and counties around the state. As far as the media is concerned, Houston IS the state of Texas, or that's what it wants to portray.

The CDC has voiced concerns with the surges in Texas, Florida, and Arizona. Indeed, CDC Director Redfield also downplayed the resurgent spread of the virus from a nationwide perspective on a conference call with reporters on Thursday when he said only 3% of counties across the country have become hot spots. That equates to 100 of 3141 counties nationwide.

VP Pence said on Friday the task force is watching 16 states where cases have increased. He also revealed approximately 30.0m tests have been performed in the U.S. More testing is leading to more confirmed cases, he said.

Elsewhere around the country, the outbreaks have been more localized. Some local officials may need to pause the reopening at current stages although that's a far cry from closing businesses and locking things down again.

Coronavirisks, the Economy, and Markets

The developments may slow the economic recovery or limit the upward trajectory of the rebound in some states, although this was always a risk once the initial stages of reopening (to 50% capacity) had occurred. As long as there are states that push through to stage 3, and there will be, optimism in the markets is likely to prevail.

The bottom line for me on the virus is that one size does not fit all. Some state and local governments may need to stall, many won't - at least at this point. Some residents will be cautious and will look to limit activity; many others will not give up their newfound freedom so easily.

I expect the nascent signs of outbreaks will force those people who have dropped their guard to realize they need to take the guidelines seriously. This should help to flatten the curves again.

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Importantly, everything I wrote above relates only to the recent developments on the virus. These developments shouldn't have a broad based or lasting negative impact on market sentiment, based on the nationwide data we have now.

As the incoming economic data continues to snap back (better) with the country reopening, optimism should prevail in the markets in the near-term.

Moreover, the Fed stands ready to incorporate more (previously announced) policy support into the system. These hot spot surges could very well bring Powell et al. off of the fence. Then we have Congress who is expected to take up another round of fiscal relief after the July 4th holiday.

Make no mistake, this shorter-term perspective (Q3) should not be confused with my longer term views on the impact that has been inflicted on the U.S. economy due to the hard, abrupt, and lengthy stoppage in global commerce at the onset of the virus. That impact has been far reaching and not yet felt in its entirety.

I roll my eyes when I hear all the pundits give their views on how long (or soon) it will be before "the economy returns to 2019 levels" of growth and activity. Really?

My thinking there is more aligned with Powell's. It will be a long road to recovery, one with many risks and structural impediments (think global debt and deficits, for one) that will slow any return to pre-pandemic levels of activity, if we get there at all. To think we will make it all up and start humming like before is simply a pipe dream, in my opinion.

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This article is part of my LinkedIn Newsletter Series: Indicators and Insights – Perspectives on the Top Financial Market Movers with a View of What's to Come.

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