At a time when the US just reported record numbers of new cases, some traders – and the general population – are starting to ask if the US economy faces a new round of lockdowns, especially under a Joe Biden administration (who frequently likes to remind his fans “listens to the scientists” which supposedly also includes such “experts” as Minneapolis Fed president who has been demanding a 6-week hard lockdown of the economy).
As BofA summarizes, US cases have now eclipsed the July peak as with the 7-day average of new daily cases topping 68k for the first time. The spread of the virus has been broad-based but there have been notable outbreaks in the Midwest. Compared to a week ago 35 states have recorded double digit growth in new cases. On the other hand, deaths remain stubbornly although these too have started to climb, increasing to just under 800 as of yesterday.
One should note at this point that as JPMorgan shows in the next two charts, over 70% of the increase in number of US cases has been due to increased testing:
Meanwhile, in the Euro area (where virtually everyone wears a mask so that excuse can’t be used), the second wave has continued unabated. The 7-day average of new daily cases has risen by 58% from a week ago to over 99k in the big 5 Euro Area economies, as of yesterday. Globally, the 7-day average of new daily cases has risen by over 21% from a week ago to 432.4k (there has been marked improvement in India, which has seen its 7-day average of new daily cases fall by 16% from a week ago and 43% from its peak to 52.9k).
Of course, there is a distinct possibility that with covid having long ago become a critical political issue in the upcoming election, a Biden win would mean that the pandemic promptly fades away from public attention on Nov 4 should Biden win. Whether that happens or not remains to be seen, but for now two key questions have emerged: will the surge in cases lead to new lockdowns, and what is the most likely trajectory of covid cases in 2021.
Addressing the first question, Bloomberg’s Ye Xie writes that “lower mortality and less stringent lockdowns than what we experienced in the spring suggest the resurgence of coronavirus in the U.S. and Europe may cause far less damage to the economy and markets than what happened in the early months of the pandemic” even if such an outcome would require more fiscal stimulus from the U.S., which implies more government debt and curve steepening.
The University of Oxford’s stringency index shows only marginal tightening of government restrictions in France, U.K., Germany and the U.S. recently. While the number of deaths has increased, the mortality rate is far lower than before.
The bottom line, and as the U.S. showed in the summer, “the economic recovery can continue amid a wave of new infections as people learn to social distance, wear masks and live with the virus.” His conclusion is that while the markets could have fared better than otherwise, “the resurgence of the coronavirus isn’t necessarily a game-changer.”
As for the second question, which involves a timeline of projected case counts, we go to Morgan Stanley which back in April built an epidemiological model to simulate the dynamics of the infection rate in the US.
According to the bank’s updated model R will exhibit an upward trend throughout the rest of 2020 both in the base and bear scenario, only to reach a mean value of between 1.3 and 1.5 in the base/bear case by YE20. Such an R value would lead to approximately ~130,000 – 200,000 new daily cases by the end of the year in the bank’s base/bear cases.
Here, a key assumption is that traditionally the spread of viruses is elevated in the fall compared to the summer principally due to more people being in enclosed spaces; the bank also caveats that its model does not account for any pharmacological intervention (such as vaccines) or strict lockdown measures that could potentially suppress the spread.
Finally, in the chart below, Morgan Stanley provides an updated Return to Work chart, which includes key events by date, along with bull, bear, and base case scenarios that detail the possible case count trajectory (the base and bear case come from the simulations in Exhibit 1, while the bull case is based on empirical model in Exhibit 2, which assumes similar trajectory as China and major EU countries during February to May with adequate interventions in place.)
Needless to say, a “bear” case which results in an exponential surge in new cases would almost certainly lead to another economic shutdown, especially under a Biden presidency.