Covid cases are surging to fresh highs in the U.S.--so why is the stock market taking it in stride?
Yes, the Dow is off nearly 500 points today after the weekend's grim news about the case count. But the market is still up nearly 6% over the past month and trading just about 5% below its February all-time highs. Back in March, when Covid was first ascendant, we were often plunging one or two thousand points a day as the market ultimately tumbled 40%.
It's not just that the 7-day average in cases is already at a fresh high of nearly 69,000. You've also got officials warning more or less that, to borrow Bill Ackman's memorable phrase, "hell is coming" this winter. The U.S. may be entering "our most dangerous time," former health official Andy Slavitt said today, in part because front-line healthcare workers are already exhausted from fighting Covid, he said. And there's still no prospect of Congress passing the next Covid relief bill anytime soon. Sounds like a formula for another market collapse.
Or not, at least so far. So what gives? For starters, the government (including the Fed) has already flooded the system with liquidity, so much so that households are sitting on roughly $1 trillion of "excess" savings, as discussed by Michael Darda of MKM Partners. That's a pretty big shock absorber. Second, Covid treatments have improved dramatically since March and a proven vaccine could be just weeks away. The death count, at least for now, remains at 40% of what we saw in the spring (chart).
And as a result, we aren't seeing the kind of large-scale shutdowns that brought the economy to a sudden stop in March. It's no coincidence that one of the market's worst selloffs came the day after the NBA on March 11th announced a halt to its season. That was when the market realized it was all going away--travel, entertainment, sports, and any semblance of normal life for the time being.
And that is the single most important factor to watch right now. It's one thing for people to start "sheltering in place" again by choice, and another if officials start doing blanket closures. The former is already having an impact, in the form of a massive gap between spending by older and younger Americans. According to Chase card data, as of mid-October, spending by Baby Boomers was still down 10% from a year earlier, while spending by Millennial and Gen Z cardholders was up 5.1%.
If spending by those younger Americans stops again, watch out. On that note, the market isn't just worried today about the spread of Covid cases here, but also about the headlines from Europe. "Italy imposes harshest coronavirus restrictions since spring"; it's now closing all bars and restaurants at 6 p.m., suspending certain sports and leisure activities, and switching high schools back to online learning.
So, watch the states--and the NFL. So long as everyone keeps messily grinding through this God-awful pandemic, we can avoid a return to the dark days of March. If the shutdowns return, however, all bets are off.
See you at 1 p.m...
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