Strategy Insight: The End of the Beginning

April 14, 2020
BBH Chief Investment Strategist Scott Clemons discusses recent improvements in the COVID-19 pandemic and the economic implications, noting that there is still more work to be done before business resumes as usual.

Amidst a global health crisis where “good” has become a relative term, last week offered some relatively good news. Although new cases of COVID-19 continue to mount around the world – and, sadly, fatalities as well – the rate of increase appears to have slowed, as social distancing measures introduced weeks or even months ago reduce the spread of the novel coronavirus. Closer to home, U.S. states are reporting similar trends. The three-day moving average of new cases in every state in the nearby graph has fallen below 10%. It is possible that some of this apparent improvement is due to reporting gaps over the holiday weekend for Good Friday and Passover, but we expect that further data this week will confirm this welcome trend.

Chart illustrating the change in the three-day moving average of newly diagnosed cases by area in U.S., with a downward slope.


We are not yet out of the woods. Newly diagnosed cases are still increasing, albeit at a more moderate pace, and ICU admissions and fatalities continue to rise more rapidly than diagnoses as newly hospitalized patients go through treatment. It may still be weeks before the pace of deaths begins to wane, as fatalities are naturally a lagging indicator.

The economy will be a lagging indicator as well, although we are beginning to get a picture of how swiftly economic activity has ground to a virtual halt. In the past three weeks (March 14 through April 3), 16.6 million Americans have filed for unemployment insurance, equivalent to 11% of the labor force and twice the total job losses incurred during the entirety of the global financial crisis. The reported unemployment rate for March was a modest 4.4%, but unemployment today is almost certainly closer to 15% and still rising.

Regular readers of our market and economic analysis will recall that personal consumption is of paramount importance to the U.S. economy. Sixty-eight percent of gross domestic product (GDP) consists of individual spending decisions, and when 15% of the labor force is out of work, and the other 85% is either anxious about their jobs, cutting back their spending or simply unable to spend as much because they are confined to their homes, the economic outlook is unarguably bleak. GDP is only calculated quarterly, and then released a month after the quarter-end, so we will not be able to quantify the economic damage of second quarter 2020 until July 30. By that point, we will hopefully be well along the twin paths to recovery in terms of both public health and economic activity, although at present neither of those paths are well defined.

Over the next few weeks, we will begin to get a clearer picture of the damage wrought at the corporate level, as public companies report their first quarter earnings and provide additional information on how they are faring in a radically and swiftly changing environment. Banks are historically among the first to report after the quarter ends, and we will hear from most of the larger financial institutions this week: JPMorgan and Wells Fargo on Tuesday, Bank of America, U.S. Bancorp, Citigroup and Goldman Sachs on Wednesday, Bank of New York on Thursday and State Street on Friday. By the end of the week we should have better insight into commercial financial conditions.

Consensus expectations currently call for an overall decline of 9% in operating earnings for the S&P 500 for the first quarter, followed by a drop of 18% in the second quarter and 4% in the third quarter, before a modest recovery in profitability takes hold in the fourth quarter (see the circled data in the nearby bar graph). The quality and accuracy of these forecasts is questionable, given the severity of the economic downturn and the temptation for companies to write off as much as they can when there is such an easy culprit to blame.

Chart showing S&P 500 operating earnings growth from 2006 to 2020, with consensus expectations for 2020 (negative Q1-Q3, positive Q4).


Financial markets moved sharply higher last week in response to a decline in the pace of new COVID-19 cases and further action from the Federal Reserve. On Thursday, April 9 – just before the holiday weekend – the Fed launched a Municipal Liquidity Facility to support the municipal bond market, revealed the details of the Main Street Lending Program focused on supporting larger businesses with up to 10,000 employees, expanded the Primary and Secondary Market Corporate Credit Facilities to include non-investment grade securities and created the Paycheck Protection Program Facility to fund loans to small businesses authorized by the Small Business Administration and implemented through commercial banks. The price tag for these new initiatives comes in somewhere around $2.3 trillion. Not bad for a Thursday morning.

The S&P 500 rose 12% in a shortened four-day trading week and is now up an impressive 25% from the recent low of March 23. As much as we would like to conclude that the market is rising in expectation of the end of this crisis, we fear that too much uncertainty lingers to confirm a market bottom, at least yet. The economic and corporate cost of the national response to COVID-19 is far from clear, as is the process and timing of restarting sections of the economy. As success in lowering the rate of new infections is confirmed over the days and weeks to come, we expect that policymakers and health officials at local, state and national levels will increasingly turn their attention to figuring out how to safely reopen parts of the economy. We will return to this theme in next week’s commentary.

After suffering a string of defeats in the early years of World War II, Great Britain finally achieved a decisive victory under the leadership of Field Marshal Lord Montgomery in the Second Battle of El Alamein in November 1942. Days later, Prime Minister Winston Churchill celebrated the victory in a speech at Mansion House in London, but at the same time warned that the war was far from over, despite victory in North Africa. “This is not the end,” Churchill warned his audience of parliament members. “It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

Success in reducing the number of new COVID-19 cases, to be followed hopefully by a similar decline in other measures such as ICU admissions and fatalities, is a welcome win in the war against the novel coronavirus. It is, nevertheless, just the end of the beginning. There is much work to be done before America is once again open for business.

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