By: Dividend Sensei
In part one of this series I showed why the “hopium rally” fueled by dreams of TINA/FOMO/QE Infinity might continue for several more weeks, or months.
S&P & Top Performing Phoenix Portfolio Holdings Since March 23rd Lows
I explained the numerous reasons that Stifel, JPMorgan, and Goldman Sachs gave for stocks to potentially rise by as much as 8% through August, which would make the S&P 500’s rally since March look even more impressive.
Popular growth stocks, such as what the Dividend Kings’ Phoenix portfolio bought in late March, might continue outperforming the market since they are cyclical and thus tend to do better during periods of rising economic optimism.
However, there is one big reason that the current rally, which has stocks about 11% away from new record highs that would create the shorter bear market in history, isn’t likely to persist through the end of 2020 and early 2021.
This Pandemic Is Far From Over
(Source: NYT state restart tracker)
By June 8th every state plans to end stay at home orders and be in phase 1 economic restart.
A major concern of experts like Dr. Anthony Fauci has been that reopening too soon might increase the transmission rate of the virus.
The transmission rate is how many new infections each current case generate in the future.
(Source: Jeff Miller)
US Effective Transmission Rates 6 Weeks Ago
US Effective Transmission Rates Today
Reopening our economies has led to a rise in transmission rates in most states, including 13 whose Rts has now risen back to 1.0 or higher.
Georgia was famous for being the first state to reopen, weeks before Federal Guidelines said it was safe. Even President Trump cautioned its Governor not to lift the stay at home order on April 24th.
Georgia’s effective transmission rate, as expected has begun rising and it’s now the highest in the country at 1.16.
Does that mean that Georgia’s daily new cases are soaring and its deaths are mounting?
Not yet, though it’s stuck in a long-tail plateau and the transmission rate data indicates new cases might start to rise soon.
Does this mean Georgia was wrong to reopen when it did? Will it and all US states come to regret our decisions to reopen our economies in phase 1?
Yes and no. Like most things in life, it’s complicated.
A group of researchers at the Center for Infectious Disease Research and Policy (CIDRAP) suggest that the COVID-19 outbreak won’t end until 60% to 70% of the human population is immune to the virus, which may take between 18 and 24 months.
The experts laid out three scenarios for how the coronavirus pandemic will progress. The worst-case scenario among these three projections involves a second, larger wave of infections this fall and winter. The report authors suggest this is the most likely outcome, and states need to prepare for it.
“This thing’s not going to stop until it infects 60 to 70% of people,” Michael Osterholm, report author and the director of CIDRAP, told CNN. “The idea that this is going to be done soon defies microbiology.” – Business Insider (emphasis added)
This pandemic is expected to last 24 to 30 months in total, and we’re now in month six. It’s not possible to lock down our economy for 2 to 2.5 years, as it would result in economic catastrophe from which we might not be able to ever recover from.
The goal of social distancing was to bend the curve and allow medical systems to handle the severe cases that sent people to ICUs. 95% of people that need an ICU and don’t get one die.
Georgia has 590 ICU beds available and currently, 311 of those are in use. Its medical capacity is nowhere close to being maxed out and so even a sharp increase in cases might mean that reopening when it did was the correct decision.
Until we achieve 70% immunity to this virus, either through exposure or vaccination, the pandemic isn’t going to end.
And in the meantime, the lockdowns we endured in April and March have wrought a terrible price on our economy.
(Source: New York Fed, Dallas Fed, Harvard)
We bottomed at -48% annualized GDP growth a few weeks ago, and are currently at -39.5%. We’re beginning to recovery slowly, as Americans start returning to stores.
|State||Rt (5/28)||Rt (5/20)||Rt (5/14)||Rt (5/7)||Rt (4/29)||Retail Mobility Data Compared To Baseline (May 21st)||Retail Mobility Data Compared To Baseline (May 14th)||Retail Mobility Data Compared To Baseline (April)||Increased Retail Mobility Since April|
(Source: Dividend Kings COVID-19 Tracker)
According to Google Mobility data, by May 21st Americans were going to stores 22% less than pre-pandemic. That’s compared to -40% at the height of the lockdowns.
As long as we’re able to avoid overloading our critical care system, then we’ll minimize unnecessary deaths from the virus.
That has always been the goal because reducing cases to zero without a vaccine or 70% herd immunity just isn’t realistic.
However, that means that investors need to be realistic.
Daily US cases have stabilized and even begun trending higher.
Similarly, deaths are running at about 1,000 per day, and reopening through phase three might require those figures to rise or at least remain stable, for the next 18 to 24 months.
What about the second wave in the fall that the CIDRAP study says is the most likely outcome? That is the single greatest threat to both the economy, millions of high-risk Americans, and the stock market.
The second wave of the Spanish flu pandemic in 1918-1919 was six times bigger than the first wave. Experts warn the COVID-19 second wave might be as much as 7X as large as the first.
That could mean we might face up to 200K daily cases in the fall or winter.
Very few states are currently prepared for that. The expert consensus is that we need 2 to 3 million daily tests per day and 100,000 contact tracers to avoid a second wave worst-scenario.
We’ve made good progress on testing capacity but are a fraction of the way to what’s needed.
By August 4th IHME estimates we’ll be at 754K daily tests, a fraction of what we need to prepare for the likely second wave in the fall.
During recent Congressional testimony in the Senate government officials said that we might be at 1 to 1.5 million daily testing capacity by the end of September.
September, when schools are hoping to reopen, is one of the primary catalysts that experts like Fauci and Dr. Thom Friedan (former head of the CDC) say could trigger a second wave.
Is the US ramping up medical capacity at record speed? Yes. Are we likely to be ready for a second wave that experts tell us is the base case? Probably not.
Is the stock market, currently high as a kite on “hopium” pricing in a second wave? Almost certainly not.
So what can you do to protect your retirement portfolio from a high risk of a second wave?