Introduction – safety first
This week’s ‘Public Service Announcement’ about COVID-19 is truncated as more and more people understand its seriousness.
The novel coronavirus that causes COVID is not “the flu” and is dangerous, especially to older people and/or those with pre-existing medical conditions.
Asymptomatic people can be infected and spread the virus, so please be careful to protect yourselves and others even if you feel fine.
Thank you, for reading what you probably already know.
Because of the importance of COVID, I have been writing a lot about it in some detail. But all articles are investment-centered. This article raises the thesis that a reason not talked about much for investors to begin to look past the COVID mess – and a mess it is – relates to the unsustainability of epidemics, assuming a period of immunity is gained when people get infected and recover (a little more on that later).
The concept that vaccinating, say, 60% of the population is enough to generally prevent an infectious disease from going into an epidemic, rather being more sporadic, is relevant to COVID in several states that are seeing high levels of new cases. I discuss a recent article that shows that perhaps 40-45% immunity rather than 60% may be adequate to create effective herd immunity. Please read at least the non-math parts of the article to understand the limitations of the approach.
In addition, another consideration is that even if not enough people are immune to the virus to create true herd immunity, if many are immune, then the reproductive rate of the virus will be constrained to lower levels than was the case when the virus appeared. I believe that the concept of near-herd immunity is another factor to consider when thinking of the future.
Thinking COVID spikes in several states through, therefore I either see them letting up or getting ready to decline due to herd or near-herd immunity.
Of course, getting “there” is not necessarily going to be easy.
Yet here is context:
As investors dealing with highly-valued markets, we are forced to think of earnings, income streams and asset values many years from now. If, as I suggest, the right play now is to start thinking of a period where COVID is either not a problem at all or becomes like influenza – endemic but manageable – it will be important to look appropriately at today’s adverse headlines but think of earnings and valuations in 2022, 2024, etc. when – I posit – investors will have moved on to other issues and concerns.
While staying safe and helping protect those who are most vulnerable in our roles as individuals, as investors we should remember that most real problems have a “sell by” date in financial markets; and that date usually precedes the actual resolution of the problem.
This article was written on Friday, July 3, but had final edits on July 4. The data is current as of Friday; please stay updated via links provided and your own data sources as interests you.
I begin with sections on herd immunity and why it could have arrived in New York City.
‘Herd immunity’ as another potential way to prevail over this virus
Why are stocks (SPY) so robust given so much bad news? The US and global economy were struggling to come out of a slowdown when the virus hit the global economy hard in Q1, and now in the US, about half the country is pausing or reversing reopening the economy as new cases and hospitalizations spike.
There have been improvements in drug treatment of COVID, with remdesivir and a steroid (dexamethasone), and certain other improvements in hospital care. I am optimistic that before the end of this year, antibody treatment for COVID, such as from Regeneron (REGN) or Eli Lilly (LLY), will also have been shown effective.
Many efforts to produce vaccines against this virus are underway. Presumably some will be highly effective, at least in younger and middle-aged people, and we can hope that they will be effective in old people as well (the most vulnerable age group to COVID).
These twin efforts are what the medical community and therefore the media have focused on. Clearly, these are immensely important.
Herd immunity, or near-herd immunity, just might be another way to help prevail over COVID.
Science recently published A mathematical model reveals the influence of population heterogeneity on herd immunity to SARS-CoV-2. This article by mathematicians focuses on epidemics such as COVID spreading rapidly because on average, one infected person infects more than one other person (reproduction number above 1). So the outbreak grows.
But if the disease induces immunity in survivors, eventually less than 100% of the population needs to be immune for the reproductive rate to drop below 1, at which point the epidemic does not spiral out of control as has COVID.
The traditional definition of herd immunity relates to vaccination, writing:
The definition of classical herd immunity originates from mathematical models for the impact of vaccination.
They continue by defining, as is convention, a variable called R0 as:
the basic reproduction number, defined as the average number of new infections caused by a typical infected individual during the early stage of an outbreak in a fully susceptible population
The authors make many assumptions and this key one:
In our model we assume that infection with and subsequent clearance of the virus leads to immunity against further infection for an extended period of time.
The CDC says this about immunity in a COVID FAQ web page:
Can people who recover from COVID-19 be reinfected?
The immune response, including duration of immunity, to SARS-CoV-2 infection is not yet understood. Patients with MERS-CoV are unlikely to be re-infected shortly after they recover, but it is not yet known whether similar immune protection will be observed for patients with COVID-19.
I will accept the assumption of the authors as an investor and for the purposes of this article.
Without certainty, I also think it is more likely than the cautious CDC view.
The main reason for this is that despite searching, I cannot find examples of COVID patients who recovered and got the disease again.
It would be worldwide news if several such cases occurred. At this point, the absence of such examples strikes me as persuasive. It would be better if the CDC would address this point.
Now, a little more on the Science article.
Adjusting herd immunity calculations for COVID
Standard formulae have suggested that if 60% of a population is vaccinated with 100% effectiveness, then R0 for the disease will be below 1, and an epidemic will not gather force.
An assumption underlying that 60% number assumes homogeneity of vaccinations and then spread throughout the population.
But, the spread of COVID is not homogeneous.
Instead, subject to the assumptions used, the authors find that perhaps only 43% of the population needs to be immune to the virus to reach herd immunity.
There are lots of “maybes” in that 43% number. Some of the potential adjustments that might be appropriate and are discussed in the article would lead to a lower number than 43%.
Publication was controversial, as Science notes in an accompanying Editor’s Blog post. Please read that entire post. I will focus on a key conclusion, which relates to my analysis. The editors suggest that no
… country is close to achieving herd immunity.
I’m going to give that a “yes… but” response. Perhaps a degree of herd immunity may explain what has happened in New York City – which has a population larger than that of many countries.
New York, New York, it’s an immune town?
NYC Health maintains a COVID data page. This shows new cases and hospitalizations spiking in March and April to very high levels, with deaths following the same trajectory with a modest time lag. Since May, the disease has been going… going… gone (almost). How much of that has been from lockdowns and social distancing? I wonder if near-herd immunity is already present in NYC given it is a crowded, highly-visited city.
Some data showing why I am wondering about this concept being relevant:
NYC reports 213,000 confirmed cases.
As I reported in last week’s COVID article, the CDC estimates that to get the total number of actual cases, not just diagnosed cases, one should take the confirmed case count and multiply it by 11 “for every case that was reported, there actually were 10 other infections”).
Adjusting, that would bring estimated cases above 2.3 MM.
Of course, that 11X factor could be too low; maybe it should be, say, 15X for NYC. Clearly, we need hard data here.
Using an estimated 2.3 MM people in NYC now presumed immune to COVID is almost 30%, close enough to 43% to raise the question of near-herd immunity.
We also may consider that children under 12 are mostly immune to COVID and mostly do not spread the disease (possibly because they have few ACE2 receptors to which the virus binds when entering cells).
According to the Census Bureau, 21% of NYC’s population is 18 years old or less. Should some of that be considered in the herd immunity model? I would think so, without trying to quantify.
In any case, it is this situation that piqued my interest given how scary COVID trends are now in many states.
The next sections go into some detail for several Sunbelt states that are having COVID spikes. I use much lower total exposure:diagnosed case ratios than 11X and discuss whether, if new diagnosed cases stay at current levels, the state is on track to potentially achieve herd immunity from COVID in 12-18 months. If so, things would be very bad for what would seem like ‘forever’ while going through it, but then COVID could fade as an investment issue (and partly as a health issue) as more people see light at the end of this viral tunnel.
To begin with my home state:
Florida: the temperature’s rising
Florida includes in its total case count both the (much more common) PCR test for acute infections and antibody tests for prior infections. It updates the latter weekly; an update is due imminently. For now, I will deflate the total case count average appropriately.
Florida reports total case counts in Florida residents on p. 2 of the State Report, covering the past two weeks. The past 7 days average about 7860 new diagnoses/day, a new peak rate. Subtracting the average antibody count of 1368/day gets to about 6500 new acute diagnoses per day.
Because much more testing is being done, rather than multiplying by 11 as CDC suggests, I will multiply by 5 to estimate new cases. Clearly, this is just a working estimate and not intended to be precise; I hope that doing the calculations this way is being conservative.
This approach suggests 32,500 actual new cases daily.
Annualizing, gets to 12,000,000 people who are going to get infected and for discussion purposes are being considered immune. Assuming 22 million Floridians, 12 MM is 56% of the population. If we used CDC’s 11X factor, we would get to an improbable 100% exposure rate.
(Note, to simplify the calculations, I am excluding deaths from COVID infections, population shifts from in-/out-migration from a state, and other real-world variables.)
If we used the 12MM estimate and extended it to the end of 2021, we would get to 18 MM.
This is without adjusting for some pre-existing immunity being present, as with young people.
Thus, Florida’s high rate of new cases cannot be sustained unless people start getting COVID a second time. Either infections will decline a good deal, or by the end of next year, a lot of Floridians will be immune and herd immunity may have been achieved.
In either case, as an investor I am increasingly prepared to look past this crisis – while trying to stay safe as an individual.
Now on to one of our two neighboring states, Georgia.
It’s hot in the Peach State, too, but COVID deaths are stable for now
In addition to The COVID Tracking Project, I follow Georgia’s official statistics through a website run by the Atlanta Journal-Constitution.
Georgia’s case count is spiking, with the 7-day average of new cases quadrupling in the past month. Hospitalizations have doubled, and deaths from COVID have been flat or even down a little.
Georgia’s case count does not include antibody tests, just tests for acute disease.
At the current 7-day average near 2400 new cases, Georgia, with almost half of Florida’s population, is just a bit behind it in new cases per capita. But it is moving at a rate that could at least in theory also lead to herd immunity by the end of next year.
Texas – also on track for herd immunity?
New cases and hospitalizations are spiking rapidly, as a Texas HHS website shows (also see a related site). Texas has nearly 40% more people than Florida with about the same number of new cases. For now, mortality trends are also stable in Texas, still at levels first reached in April.
Texas may be farther from reaching herd immunity next year than Florida or Georgia. A different multiplier might be appropriate in Texas, and using 7X instead of 5X for converting from diagnosed cases to actual cases would make up the difference.
In any case, Texas may at least be on track for near-herd immunity by the end of next year. Thus there may be an important degree of unsustainability in current infection rates there; things may be a lot better there by 2022 and perhaps much sooner.
Arizona – some positive details amongst the spike
Arizona’s Department of Health Services maintains a top-notch COVID website. Click on a major tab, then a sub-tab, scroll down (the data is there but you don’t see it unless you scroll), and you see lots of detailed data.
Per the “cases by day” tab, Arizona’s COVID problem has been in a slow acceleration since its first cases 4 months ago. Now it is at a boil, at a rate that suggests herd immunity next year if this rate is sustained.
but here are some encouraging details that are interesting to me in addition to the adverse numbers (Click on “Hospital COVID-19 Specific Metrics tab on the bottom right of the above-linked web page).
Intubations COVID (sub-tab)
The number of people being put on ventilators is stable, around 65/day. This is a number first reached two months ago, when new COVID cases were much lower.
What does this reflect?
Perhaps some combination of:
- milder cases being hospitalized
- better drug and other treatments being available
- greater general ability to support severe pneumonia cases short of intubation
- other factors.
I find this a surprising positive.
Are better approaches to COVID already being reflected in this data?
Ventilators in Use (sub-tab)
This shows a steadily growing number of patients on ventilators, even though the number of intubations is stable.
This suggests that people are being kept on ventilators longer.
What percent of the long-term ventilator cases, numbering 489, are going to survive?
COVID-19 Deaths (new tab)
Deaths from COVID-19 have been stable to declining; these lag hospitalizations. In addition, knowing the number of patients on ventilators suggests to me that there are a lot of pending deaths.
Arizona has the same population as New York City, but has reported less than 10% of the number of confirmed NYC deaths.
Finally reaching the coast:
California – less severe problem
With almost 5X the population of NYC, California reports only about 1/3 of the number of total COVID deaths, using only confirmed NYC deaths and ignoring the 4000+ probables there.
California has about 5500 COVID-positive patients in the hospital, not many more than Arizona. Deaths from COVID are holding steady, around 70 per day.
Both California and Arizona have some in-patients who are American citizens who were residing in Mexico, got sick, and made it home for superior medical care. I do not know if those sorts of numbers are available.
Outside of LA County, it appears that California’s numbers and trends are not at a level that would induce near-herd immunity next year. So there is reason both for optimism, and also the awareness that things could get much worse in California.
Medical and media summary – Part 1 – general comments
Of the 5 larger states discussed, including the Big 3 in terms of population accounting for about 27% of the population of the US, all are seeing spikes in COVID cases. These are mostly “first wave” phenomena.
The good news includes hospitals now with adequate quantities of ventilators, protective gear and supplies. They also have had time to reorganize their operations and create flexible ICU planning. Global information-sharing has led to better methods of treating and triaging patients. Remdesivir likely is showing good results in the real world, or else Gilead (GILD) would not be spending lots more time and money by expanding clinical testing.
Yet headlines from financial media remain negative. E.g., Bloomberg News leads (Friday) on its front page with this typically negative verbiage:
U.S. Cases Rise 2.1%; WHO Uncertain on Vaccine: Virus Update
U.S. cases rose 2.1%, in line with yesterday’s increase.
Florida’s new cases rose 5.6%, less than seven-day average, while daily deaths in Arizona declined. New York’s infections rose by 0.2%, a rate that’s been stable for almost a month.
The “Markets” section of Bloomberg’s website also leads with an unduly negative headline which is the lead headline:
Stocks Pare Gains as Virus Angst Offsets Jobs Data: Markets Wrap
(Bloomberg) — U.S. stocks pared gains on speculation that a second wave of coronavirus cases could jeopardize an economic rebound from the sharpest contraction on record.
A little more on the latter headline later.
But I want to summarize the major focus of this article.
Medical summary – Part 2 – epidemics run their course
As detailed above, several states are running so “hot” in new COVID cases that using about half the ratio of undiagnosed to diagnosed COVID cases the CDC is now estimating, these states may well be on track to achieve herd immunity by or before the end of next year.
There are many uncertainties to the above statement; new case counts may decline.
But what my analysis implies is that either the virus mutates rapidly and adversely or people begin to get reinfected with COVID; or we are going to win the COVID war in a time frame suitable for investors to begin looking at a post-COVID world.
Reasons for optimism include:
- better drug and other treatments for COVID
- potential for effective vaccines, including ones that protect the elderly
- herd immunity or near-herd immunity could appear well within the next two years, if the bad news on COVID cases in several states does not let up
- the virus could mutate to become less dangerous.
Now to some investment thoughts based on taking the more optimistic point of view:
Looking beyond COVID to a brighter tomorrow – and going against the grain of the media
Let’s take the second of the above Bloomberg headlines. A traditional headline would not focus on the negative COVID news, given that a strong week ended with another up day.
A different, down-the-middle way of reporting the same news could have been:
Stock market closes up on strong jobs; investors look past COVID spikes.
When I see a barrage of slanted headlines, I look to tack bullishly.
I simply think that the public is being fed a diet of COVID news that is even worse than the reality – which is bad enough – and that this is likely being reflected in stock prices.
As noted, this article was written Friday and edited by me and submitted Saturday, so the above Bloomberg headlines were from Friday. On Saturday, its Markets section remains bearish, which as a long-only investor I like. The lead headline is “A $10 Trillion Rally Hinges on Earnings Nobody Has a Clue About.” This is completely wrong. Actually, nobody cares much about Q2 earnings that are about to be reported; it’s a recession/depression quarter. We do care about guidance, however. Then there is, under “The Latest” group of headlines, the usual COVID scare headline, this one titled “Fearful and Frugal: Coronavirus Wreaks Havoc on America’s Psyche.” Well, maybe, but this is almost exactly the sort of headline we saw in 2009, as markets and the economy were beginning their sustained moves upward.
This sort of media emphasis on real – but known – negatives could explain why the American Association of Individual Investors continues to show a high level of bears. This contrary indicator has had a strong record at least since late 2016 (h/t @hmeisler). When bears are high, the SPY has trended up.
Moving to fundamentals, I think that many people are too bearish about the recession. The markets have been signaling an end to the recession/depression for three months, which typically would mean that the downturn is ending in July.
Perhaps representative of informed sentiment, I came across this question from Charlie Bilello, in a tweet, which asked readers to vote on when the recession would end. The choices were by:
- December 2020
- Jan.-June 2021
- July-Dec. 2021
- Jan. 2022 or later.
In contrast, I believe the recession either has ended or is ending soon.
That belief does not mean I think the rebound will be a full “V,” but when jobs rebound so strongly, then income, spending and production will move in the same direction – up. That’s what defines the end of recession, but it does not mean a return to prior levels of economic activity.
No doubt things are messy and uncertain.
But, we invest and trade based on how we see today’s and tomorrow’s scenarios playing out. We look for alpha if we have a thesis that involves seeing something important that Mr. Market is missing.
My thesis is that it is time to skate to where the puck is going: my guess is a world where the world has dealt with COVID as best it can, and that investors have moved on to focus on the many other trends and issues that drive asset prices.
That leads to some brief updated investment points
First, please see my June 28 article for market views.
Also relevant are the points I made in an April 1 article, the first time I was feeling bullish after getting heavily out of the market Feb. 26. That article was titled 3 Antifragile Stocks I’m Buying, And Why I’m Starting Now.
These stocks were:
All have done very well since April 1. The thesis for AMZN and ZM was largely the lockdown/work-from-home scenario accelerating trends already in force.
Now that I have begun to look past the era of COVID driving market movements and media headlines, I have moved on from AMZN and ZM, and late last week began selling some MSFT out of an IRA (it is still my #1 stock).
It is just my guess, but I am increasingly willing to look at investments that are not especially driven by stay-at-home, contactless strategies given how far they have moved up in price by now.
Based on valuation of many high-flyers and on the many Old Economy sectors in the SPY that I believe are not coming back any time soon, if ever, I am not bullish on the SPY. But as discussed last week, I think there are many reasonably attractive places to put money given massive support from both the Federal government and the Federal Reserve. The many upside surprises in US economic data lead me to await management’s commentary on recent business trends with a certain degree of optimism.
Thanks for reading and sharing any comments you wish to contribute.
Submitted Saturday morning.
Thursday’s closing data:
SPY $312.23 , 10-year Treasury 0.67%.
Disclosure: I am/we are long MSFT,GILD,REGN,LLY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Not investment advice.I am not an investment adviser.