Hi. I hope my article finds you and your family well during these challenging times. Our best wishes go out to those who have been impacted or lost loved ones to this virus and we send our deepest gratitude to the medical professionals, first responders and frontline workers taking such good care of us. As the country enters its second month of broad lockdowns, our thoughts are also turning to what will reopening even look like. A divide is opening between those who think stay-at-home orders should remain in place and those who think restrictions should be lifted today. So, without weighing into the fray of when, we think it’s important to explore what the grand reopening of our country could look like.
At some point during this crisis, 42 states have issued stay-at-home orders, essentially shutting the country down. While effective in combating the pandemic, these policies have dealt the country a severe economic blow. As businesses across America shut their doors, the ranks of the unemployed swelled by 26 million people. A U.S. economy that had been humming along declined by 4.8% in the first quarter. This is notable, as January and February were largely unaffected, so most of this decline occurred in the month of March. In attempts to mitigate the economic and social impacts of the stay-at-home orders, Congress passed a series of relief bills totaling roughly $2.3 trillion or 10.8% of total U.S. economic activity. Many businesses that are now closed, will likely not reopen and will be lost forever. Economic distress notwithstanding, there are also severe social consequences, including an 891% increase in calls to the suicide prevention hotline, miles-long lines for food assistance in Texas, California, Minnesota, Iowa and other states and a dramatic reduction in patients seeking medical help for illnesses such as cancer and heart disease.
As of this writing, 32 states will have eased at least some restrictions. In Georgia, shelter-in-place orders were lifted, although medically fragile and elderly persons are to remain at home through June 12th. In Texas, retail businesses can begin reopening but must limit capacity to 25% of their listed occupancy. Healthcare professionals including the well-respected Dr. Fauci, have warned that some states are taking a significant risk because they have not met federal guidelines which include a decrease in cases over a 14-day period. These states will be the proverbial canaries in the coal mine and will provide valuable data to better inform our understanding of this virus and help guide policy decisions.
Early indications from the states that are reopening show the public is slow to return to normal and likely will not do so until they feel safe. A recent Ipsos poll showed that two thirds of Americans are nervous about leaving their homes even if businesses reopen. On April 20th, South Carolina allowed retail businesses to open again, data from TomTom, a leading location, navigation and map technology firm, shows that traffic levels have not changed much since. Additionally, there are indications that businesses may make their own reopening decisions based on the data and recommendations of health officials rather than relying on politicians. Employment reports shows that average hours worked at small businesses across the US began falling in mid-March, weeks before most stay-at-home orders were issued. Clearly consumers and businesses must feel safe again before activity will look anything like pre-pandemic life.
In April, McKinsey & Company, the global consulting firm released a framework for how to restart the national economy. In their report, McKinsey says “governments that wish to restart their economies must have public health systems that are strong enough to detect and respond to cases.” According to McKinsey the most important criteria are the number of new cases and the strength of the healthcare system within a region. Based on these criteria, McKinsey created a matrix by which regional policymakers can determine their preparedness to reopen. The challenge in this approach is the lack of widespread testing. According to Johns Hopkins, as of May 1st, only 6.3 million Americans have been tested - that’s less than 2% of the population. Without this critical data, it’s not clear how local leaders can make informed decisions.
As for the stock market, investors seem to be pricing in a “V-shaped” recovery - a sharp economic decline followed by a quick and sharp surge. The longer our economy is shuttered, the less likely this scenario. We are expecting more of a “U-shaped” recovery, as the sharp decline gives way to a period of subdued economic activity while health professionals search for a vaccine, governments figure out how to balance the seemingly contradictory priorities, businesses adapt to the new normal, and citizens look to feel safe. Considering this scenario, markets may have gotten ahead of themselves, and it is likely that extreme volatility will be with us for some time. It’s also worth noting that the industries most affected by the shutdowns account for only 7% of total S&P500 earnings. Second quarter economic activity will rank among the worst in our lifetimes, but we know this. Look for broad improvement in the fourth quarter of this year and into 2021.
Many obstacles must be overcome before businesses can begin to open in any meaningful way. Challenges such as how parents will be able to return to work while schools are closed? Will employees feel safe enough to return? Will temporary increases in unemployment benefits mean workers would prefer to stay at home? Some businesses are likely to face increased safety requirements, such as masks, gowns etc.; will these businesses have access to these supplies? How will employees get to work when many do not feel safe taking public transportation?
The most likely scenario is that a return to pre-pandemic life will be slow, regardless of when state governments begin lifting restrictions. Absent a vaccine, we’ll need to figure out how we can get our economy moving and people back to work in as safe a manner as possible. It’s clear that broad shelter-at-home policies are having collateral consequences and it increasingly seems like we ’re trading one bad outcome for a different bad outcome. The monumental challenge facing policymakers, is to find a way to balance lives with life.
As always, we appreciate your trust and confidence. If you have any questions this or any other topic, please reach out to your advisor and visit our website at EBWLLC.com for all our Coronavirus related materials.
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