As we head into Memorial Day weekend and the “unofficial start of summer,” more evidence is emerging that the worst of the health and economic impacts of COVID-19 may be behind us.
Death rates and hospitalizations, in aggregate, continue to fall in the U.S. and around the world. We saw good news this week about a potential vaccine for the virus; a vaccine is a big deal because only with a vaccine can we put an end to the COVID-19 crisis. Further, while we must protect every member of our population, the data is increasingly showing that mortality risk is concentrated in individuals over 70 years old or with significant preexisting conditions, meaning that for most working-age people, getting sick might be unpleasant, but it isn’t likely to be deadly.
Economic activity is also coming back around the world, as people start to reemerge. Containment measures in Asia continue to soften, Europe has been thoughtfully lifting restrictions, and the U.S. isn’t far behind. Every U.S. state has lifted at least some restrictions, while some states, like Texas, are reopening at a considered pace, and other states, like Georgia, have fully reopened.
We can see the physical evidence of this reemergence everywhere: Cell phone geolocation data shows people are moving again, and aggregate credit card data shows people are spending again—albeit not at (or even near) February levels. The stock market seems to be optimistic as well, continuing its upward climb from its March 23 low.
So, with all this good news, it might seem odd that the Federal Reserve issued a statement this week from its Open Market Committee that doesn’t sound very optimistic:
Participants judged that the effects of the coronavirus outbreak and the ongoing public health crisis would continue to weigh heavily on economic activity, employment, and inflation in the near term and would pose considerable risks to the economic outlook over the medium term.
In other words, we might be past the worst, but we aren’t back to normal.
Research suggests the slowdown in economic activity was more likely a product of individual risk assessment than the result of “shelter in place” orders from the government because the slowdown in activity started well before the orders were given. This means that even if countries and states open up, people might not go back to life as normal. In a recent poll, less than half of people surveyed would fly on a plane, go to a stadium or shop at a mall, even if public health officials said it was safe.
And while the worst of the virus might be behind us, there is likely more to come. China saw its second wave of infections after reopening, and the U.S. could face a second wave in the fall—similar to the Spanish flu of 1918—which could result in even more economic disruption.
Even once we have a vaccine to help eliminate these fears, getting back to normal is hard. Tens of millions of people need to be reemployed, shuttered businesses need to be replaced, and the debt burden across all levels of society needs to be worked down—which weighs on a return to normal.
One of the most interesting debates related to the crisis has been its medium-term impact on inflation. The initial drop in demand resulting from the containment measures is clearly deflationary, which we saw reflected in negative oil prices. However, the unprecedented expansion of the Fed's balance sheet, combined with the direct stimulus payments provided to consumers and businesses, should be inflationary.
Essentially, we have more money chasing the same amount of goods. Whether that leads to inflation will depend on how fast that money continues to flow; if the velocity of money picks up, prices will rise, if it stalls—as it did after the 2008-2009 Great Financial Crisis—prices won’t rise. It’s too early to tell how this will play out, but we are monitoring the situation closely.
While things are getting better, it’s hard to see things getting back to normal any time soon. Even if we find a miracle cure tomorrow, the economy will take time to heal, which is at the core of the Fed’s apprehension—and ours.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Series 7 & 24 Securities Registrations,1 Series 66 Advisory Registration † Jim brings significant financial services experience along with the investment management industry’s best thinking and best practices to his role as Chief Investment Officer of Wealth Enhancement Advisory Services. Throughout his professional career, Jim’s philosophy on investing has centered on providing clients with...Read More