Core U.S. bonds on the Bloomberg Barclays U.S. Aggregate Bond Index closed the week slightly higher, up 0.2%. Equity markets also drifted higher, with the MSCI ACWI Index, which represents global equities (i.e., both U.S. and international stocks), finishing up 2.0%, and the S&P 500 finishing up 1.8%. International stocks had a similar showing, as the MSCI ACWI Ex-USA (international stocks) was up by 1.9%. The U.S. small cap Russell 2000 closed the week lower by 0.7%.
New COVID-19 cases and hospitalizations have increased at a high rate across parts of the United States; however, daily deaths attributed to the virus continue to decline. Even in “hotspot” areas like Texas, Arizona, and Florida, reported COVID-19 deaths have remained steady since May 29, as the chart below, on the right illustrates.
The key takeaway for investors from these charts is the disparity between daily deaths (red line) and new daily infections (yellow line). Despite the increase in new daily infections, we have yet to see an equivalent increase in the number of new deaths each day. The exact reason for this disparity remains unclear, but it is a number we will continue to watch closely.
In the months between the initial wave and the current surge, we have developed a better understanding of COVID-19 and ways to combat its toll that are less economically destructive than shelter-in-place orders. For example, while ventilators still are in short supply, the medical community has identified alternative oxygen treatments for COVID patients that can slow or even eliminate the need for one. These alternatives, along with new treatment modalities like remdesivir and dexamethasone, give providers more options for effectively treating COVID patients.
The gains in understanding virus transmission and the development of more effective treatments are significant for investors because they boost confidence in our nation’s ability to gradually return to normal. Financial markets have been — and will continue to be — focused on policy responses, and policymakers are primarily concerned with the death rate rather than the rate of new infection.
Going forward, we believe the bar is now set higher for widespread closures than it was in March. Given the economic effect of shelter-in-place orders, state and local officials are unlikely to take such extreme measures unless absolutely necessary, and we believe that any further shelter-in-place orders would be much more targeted than those implemented earlier this year. For now, social distancing protocols and protective measures seem to be enough to keep the pandemic reasonably under control and promote gradual (if sometimes uneven) re-openings, which should limit the greatest economic consequences to specific sectors and populations.
On Tuesday, President Trump reiterated his desire to see another round of stimulus checks in the next fiscal bill. The income threshold for stimulus payments will likely be lower than it was under the CARES Act. Senate Leader McConnell has expressed a preference to limit stimulus payments to individuals earning $40,000/year or less. To that end, the bill also is expected to extend federal unemployment benefits beyond July 31st to avoid a potential sharp decrease in income for unemployed workers. These benefits are anticipated to be lower than the current rate of $600/week in order to further incentivize workers to go back to work.
It appears that Congress will focus further aid on companies and workers that have been hardest-hit by COVID (i.e., targeted programs as opposed to broad stimulus). The details are still coming into focus, but we could see fiscal packages similar to the Payroll Protection Program (PPP) that are only available to businesses in specific industries. In addition, some of the largest companies in the U.S. — including Coca-Cola, Hyatt, and American Express — jointly sent Congress a letter expressing their support for a bill that would provide approximately $120 billion in relief for the restaurant industry.
This is important for investors because, as we have noted before, financial market movements tend to look beyond the present and ahead to the likely future effects of policy actions such as fiscal stimulus. Another stimulus package would demonstrate that lawmakers are still taking seriously the continued economic threat posed by COVID-19. At the same time, the targeted approach favored by Congress suggests that lawmakers have confidence in the pace of recovery. In aggregate, we believe that a fifth stimulus of significant size ($1 trillion or more) would be positive for investor sentiment and, therefore, may also provide an additional boost to global equity markets.
The bulk of the media’s coverage of the pandemic has focused on the negatives, which can obscure the larger picture. We continue to believe that the pace of recovery is cause for cautious optimism. Even if the recovery periodically takes one step back and two steps forward, now is the time to stay focused on your time horizon, financial goals, and your personalized strategic portfolio.
In the coming weeks, our commentary will increasingly address the November elections. We will continue to monitor all developments regarding COVID-19 and its potential impacts on economic activity and equity markets. If you have any questions about this week’s newsletter or the markets, please do not hesitate to get in touch with our team.
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