Bad, But Getting Better: A Fact-Based Look at Reopening the Economy

Jeff DeMaso:
Hello, and welcome to another The Adviser You Can Talk To Podcast. I’m Jeff DeMaso, director of research here at Adviser Investments.

Liz Laprade:
And I’m Liz Laprade, research analyst at Adviser Investments.

Jeff DeMaso:
Great, thanks for joining me today, Liz. We’re going to do things a little bit differently today. Rather than just having one moderator and one speaker, we’re going to shift roles and trade off roles as we both want to share a little bit of research we’ve been doing into pandemics, coronavirus and the current economic environment.

Liz Laprade:
That’s right, Jeff. But before we begin, I do want to say that all of us here at Adviser Investments are sad and in pain by what we are witnessing in our nation. Racial injustice and inequalities that have long been seen but unacknowledged by many in our society are finally coming to the fore in public protests that we believe are necessary to improve conditions for all Americans, regardless of their skin color or social standing.

While painful, we are confident that protesters’ voices will finally be heard and that our nation will find a way through this and emerge the better for it. So, Jeff, I know that you’ve talked about the fact that we’ve actually been here before in the U.S. in a way, which was surprising to me and maybe others, but actually certain generations have already lived through pandemics here. Can you just tell me what that looked like, and why does today feel so different?

Jeff DeMaso:
Yeah. We often try and look back at history to see what we can learn about our current environment, and the big pandemic that everyone jumps to is in the 1918 Spanish Flu. It’s gotten a lot of press, but it’s actually, I think, a tough one to use for the current comparison. First off, it’s over 100 years ago, and our economy was just dramatically different back then from today.

Jeff DeMaso:
The second is that it’s hard to separate its impact on the markets from World War I. Both were pretty dramatic events at the time. Then, unfortunately, there’ve been two other flu pandemics that the CDC estimates resulted in over 100,000 American deaths, which is a pretty grim milestone, and I want to acknowledge the human toll that comes with those but again, trying to put that aside and focus here on economies and markets. So let me quickly talk about those two past pandemics, give us a bit of history lesson there, and then talk about why it’s so different today.

Liz Laprade:
Perfect.

Jeff DeMaso:
First, 1957, 1958, this is a H2N2 pandemic resulted in a million deaths worldwide and 116,000 here in the U.S., so dramatic toll on human life. From the market perspective, stocks did go into a bear market on the first wave of this virus. But interestingly, the second wave, which was unfortunately more severe, marked the bottom in the market, and stocks rallied nearly 40% in 1958. So, markets had kind of adjusted and come use to the pandemic environment.

Jeff DeMaso:
Then, the next one came just about 10 years later in 1968, it’s the H3N2 pandemic. It actually evolved out of the 1958 virus and, interestingly, is still circulating today in the world. Now, the stock market did not have a good late 1968 or 1969, falling some 35% or so. Notably, this virus also had a second wave, which was less severe in the U.S. but more severe overseas. Pandemics don’t always hit each part of the globe equally. But from the market and economy perspective, 1968, ‘69 was a pretty volatile time, maybe some actually parallels to draw today. But there was a presidential election in 1968. The Vietnam War was a driving factor in the American psyche at the time. There was also issues around race and assassination of Martin Luther King, Jr. So it’s hard to say specifically what was driving the market to say it was just the pandemic driving the market at that time.

Liz Laprade:
Right. I would say history doesn’t repeat itself, but then what are you taking away from these past pandemics?

Jeff DeMaso:
Well, it’s a good question. I mean, first off, it’s two data points so we do have to be careful about drawing too much of a conclusion. The 1958 results suggest that markets can rally off of bottoms coming out of pandemics. The 1968 experience tells us that maybe there’s more than one thing always impacting the economy and markets. Probably the bigger takeaway is that we’ve overcome the flu before, and I think we can do so again. The really, really big difference today is the policy response. In the ‘50s and ‘60s, we did not have widespread shelter-in-place lockdown of economies, where today, that was a pretty standard response in many parts of the U.S. and across the globe.

Jeff DeMaso:
But then I guess that brings us to where we are today, and we’re starting to reopen the economy and countries. How we manage the restart to the economy, if we can do it, it’s a question we’ve heard a lot. It’s a question we’re asking ourselves. Maybe we can flip roles here because, Liz, I know you’ve been digging into how reopenings are going both at home and abroad. I guess since we can’t travel now, maybe you can give us a virtual global tour. But before we embark, maybe kind of pack our bags a little bit, and just what data have you been looking at? Kind of set the stage for this trip, and then we can kick off.

Liz Laprade:
Sure. Let me just say, overall, I think things are headed in the right direction. Broader economic data, meaning when I’m looking at other countries and how they’re doing, a lot of that is lag. So, for example, unemployment numbers may only be reported every few months in a certain country. So, we may not see those numbers in time, meaning today, to make any sort of conclusion from it. But we are able to look at the economic and medical data and some other, I guess, unconventional sources of data that gives us more of a real-time look. So we’re looking at things like OpenTable, which shows us are people going out to eat again? Are they making reservations? We’re looking at Google Mobility. Are people moving around again, and how are they doing it?

Liz Laprade:
And truthfully, just observing what’s going on around us. We’re in Massachusetts, and we’ve been in a shelter-in-place for months now, but there are other parts of the country that have started reopening. I’ll talk a little bit about that when we get there. So basically, I’ve looked at different countries, including the U.S., and then I’ve looked more granularly at some of the States within the U.S. that have started reopening either end of April or early May.

Jeff DeMaso:
Okay, great. I think that sets the stage for this tour. Before we get to the U.S., let’s start with Asia and we’ll move from there.

Liz Laprade:
Okay. Sure. China’s probably the most well-followed country to reopen early, which makes sense. It was the epicenter of the disease, and it started all the way back in sometime in December. The economy there is basically back to at least 80% capacity. People are eating out again. People are traveling again. Schools are open. Things are looking pretty normal there. Cases have been on a steady decline for months. The average new cases a day since the beginning of May is six. Assuming you can trust the data, you could definitely say that China’s beaten the virus.

Liz Laprade:
In fact, things like auto sales have rebounded really quickly there to pre-coronavirus levels. Some attribute that to cash subsidies that citizens received during the time when the economy was shuttered, similar to something we had here in the U.S. I mean, maybe you can infer it’s a transportation thing, a societal change. Maybe people are a little more nervous about walking in crowds or taking public transportation and using some of that extra cash to purchase a vehicle. So that was an interesting data point to see coming out of China.

Jeff DeMaso:
I agree, Liz. I think that’s one of those questions of how will the behavior change coming out of this period? Maybe it’s less public transportation, means more driving, maybe more bikes. I think we’ve seen bike sales here in the U.S. pickup as people are looking to get around on feet or two wheels.

Liz Laprade:
Yeah, definitely. Definitely. We’ve seen that in Europe, too, bike sales are just through the roof as an alternative way to, yeah, get around places without feeling like you’re in a big crowd. So, sticking with broader Asia, let’s talk about South Korea. South Korea has been applauded for the way it handled the virus. They never had to do complete travel bans or really strict shelter-in-place lockdowns. Some of that could be attributed to what they went through in 2015 with MERS, which is also coronavirus-disease-based. It wasn’t as deadly, it wasn’t as contagious as the coronavirus we’re seeing today. However, they learned a lesson through that. Government health officials didn’t do a great job of containing that virus back then. So what happened after that was they created organizations and policies that are really focused on tackling a pandemic or an outbreak if it were to ever happen again.

Liz Laprade:
So when they saw the first case come out in South Korea, which was actually on the same day we saw our first case in the U.S., which was January 21, they acted really quickly. They started aggressive testing. They were tracing aggressively. They were putting in distancing measures, and citizens were adhering to all of these warnings. So they were able to kind of put health officials and advice in the front seat and people listened to them. That went really well for them. In fact, retail sales are getting better, but they did hit a bit of a speed bump early May.

Liz Laprade:
So the economy early May was pretty much at full capacity, similar to China, to the point where nightclubs were open. You’re looking at crowds, close quarters, people probably yelling over the music, and someone had coronavirus. So it started to spread. You’re trying to track thousands of people down that may have been exposed. You did see cases spike up. When I say spike up, I want to be sure to say that that’s relative. When I say spike, I mean it went from maybe 12 new cases a day to 90 but at its peak, it was 1,000 new cases a day. So we’re not looking at what I would call a second wave, but you did see a spike come out of this event over the nightclub. In fact, South Korea had to take a step back and shut schools down again. So that’s definitely something we’re watching very closely to see. Are they able to contain this small outbreak, or what’s going to happen?

Jeff DeMaso:
I think the relative numbers are helpful because as you say, it’s not a second wave but an isolated outbreak. We’ve seen actually similar ones in China where they’ve had small outbreaks that were able to be contained. So maybe a sign of what’s to come here. Now, let’s pivot. What are we seeing in Europe, and are there any lessons we can learn from how they’re faring?

Liz Laprade:
So Germany and Denmark specifically in Europe have done really well, and they’re still doing well today. They’ve broadly new cases trending down since they started reopening with some small spikes along the way, but really well overall. Germany led by example in Europe, and they attribute this to aggressive testing. They actually started developing a test in January before they ever really saw a big uptake in cases. They had test kits ready to go across the country. So they were able to start testing not only those that were coming in and having symptoms but people that didn’t have symptoms. If you don’t have symptoms, it’s almost more dangerous because you don’t know when you’re going around, and you’re interacting, and you’re spreading it, and you don’t know you’re spreading it. That was really big that they were able to test both sick people and people that were asymptomatic.

Liz Laprade:
Whereas here in the U.S., we kind of started just testing those that were coming in really sick. I think that was a huge factor for Germany doing so well. In fact, Germany is one of the first data points we see from OpenTable showing that they’re actually seeing reservations for restaurants higher than they were a year ago from today, so 30% higher than a year ago from now. So that’s great. People are going out to eat again. Restaurants are getting income coming in. So that’s great news to see, and they’re actually opening shops this week, they’re raising the number of gatherings much higher, and people are actually able to visit nursing homes and assisted living again with restrictions, of course, but you can kind of think of those places as the last place that reopening goes. They’re pretty far down the line, as far as getting back up and running.

Liz Laprade:
Then Denmark was one of the first to shut down amid the coronavirus breakout and one of the first then to reopen. They attribute this to they didn’t wait to see any wave before they shuttered their economy. Their seven-day moving average of new cases was about 100 when they shut down versus the U.S. We were closer to 1,000 by the time we started doing shelter-in-place. They essentially shut down to the same extent as we did here in the U.S., just much earlier, and they were actually the first country to reopen schools in Europe. So, while Germany and Denmark acted quickly, had aggressive testing, and it worked out well for them and to date, it’s definitely going really well over there.

Jeff DeMaso:
Okay. So some encouraging signs, at least in terms of countries’ ability to reopen?

Liz Laprade:
Absolutely.

Jeff DeMaso:
All right. Bring us home. What are we seeing in the very large United States?

Liz Laprade:
Yeah. So the U.S. still has a long way to go here. New cases are definitely starting to flatten out. But I decided to look at some of the States that opened early on to maybe guide some expectations. I took a look at both Georgia and Texas. Both states had declining seven-day moving averages of new cases before they reopened, which is a huge factor for that decision on reopening any part of your state. They both reopened early May, and the reopening phases looked very similar. They opened spaced out dining so restaurants were open to a smaller capacity and tables were farther apart. They lifted shelter-in-place, the hair salons were open, and social distancing was relaxed.

Liz Laprade:
But since Georgia has opened, new cases and the moving average of new cases has continued to increase. It has not declined yet. I also saw a spike after last week, which I think is probably attributed to the long weekend. There’s probably some travel so people coming from out of state into Georgia, so that’s something I’m keeping an eye on. But on the other hand, OpenTable reservations there are up about 30% from where they were basically at zero in April so that’s good news and still keeping an eye on how they’re going.

Liz Laprade:
Texas, very similar to Georgia on the medical side. Both states, hospitalizations are down, which is great. The increase in number of tests performed, there’s been a lot more testing going on, which is a good thing. We’re trying to catch as many people as possible. But in Texas, the percent of those tests given that are positive are flat to declining, which is great. There was a slight uptake as well in Texas after last weekend, but I would also attribute that to travel, the long weekend, people wanting to get out, and their reservations for restaurants are up about 35% from where they were in April, which is also a good sign.

Jeff DeMaso:

That is an encouraging sign. I guess, as I alluded to, it’s a large country, nice to see some places are starting to open. Even on a smaller geographic level, there’s still some big differences going on. I mean, you’re in Massachusetts, it’s still kind of locked down. We’ve got family in Rhode Island, it’s got a totally different environment there.

Liz Laprade:
Yes. Yeah. Let me talk about that. So yeah, Jeff, you’re over there in New York City. I’m here in Boston. We’ve been very strictly locked down. But I’m from Rhode Island, and Massachusetts also borders Rhode Island. Rhode Island actually started opening up restaurants a couple of weeks ago, only outdoor seating for now. But Rhode Island now is actually leading the United States in OpenTable, meaning they’re almost back to normal in the amount of people that are going out to eat today versus a year ago. What I attribute that to, and this is just my personal opinion, is that a lot of people go to Rhode Island in the summertime and they go down to Southern Rhode Island and eat out in places like Newport, and Bristol and Portsmouth. Those places are on the water so they’re set up for outdoor seating already.

Liz Laprade:
It’s a small state so that makes up a fair amount of people going out to eat in the summer. So I think that those restaurants were in a good place to have outdoor seating available versus maybe the inner-city, maybe Providence, where they’re not so much set up for outdoor seating, they’re indoor seating. I think that’s really helped with the summer crowds that come to Rhode Island and the fact that all of those big restaurants advertise outdoor seating anyway without coronavirus. So, yeah, people have been going out to eat. My family, my friends are going out to eat and socializing again. New cases are still trending down in Rhode Island. I know it’s a tiny state, but things are going well. It’s really interesting.

Jeff DeMaso:
Yeah. I think we do need to acknowledge here that we’re reopening the economy and, as you say, we’ve seen some increases in some states but no real big second wave. The protest here, I think, from a pandemic standpoint are a little bit of a new variable. In terms of all the reopening phases, gathering in large groups would have been just the bottom of the list. Sporting events were not going to happen anytime soon, at least not with a crowd. But now we’re actually gathering in large groups right at the start of reopening. I think it’s clearly too soon to say if this leads to a spike in cases. Of course, the hope is that it doesn’t, but the risk is heightened and it’s definitely something we’re going to have to watch closely in the data here.

Liz Laprade:
Right. No, I agree. It’s definitely a new variable.

Jeff DeMaso:
Okay. Let me see if I can try and tie up a lot of what I’m hearing, and call me out if I’m off-base on this but I almost describe it as things are bad but getting better.

Liz Laprade:
I agree.

Jeff DeMaso:
So you mentioned the OpenTable data at the U.S. We essentially stopped eating out entirely. Now, collectively across the U.S., it’s up about 15%, which is better than it was, but that’s still nationally 85% below our usual level of eating out. Or, we could look at TSA tells us how many people are going through their checkpoints, essentially, how many people are flying every day. Recently, about 300,000 people have been flying, which is a really big tick-up from March and April, where there was only 100,000 people a day flight. So better, but usually, 2 million people fly every day in the U.S. so we’re still kind of well below your activity levels.

Jeff DeMaso:
You can see that in consumer spending data. You can see it in manufacturing data. The mobility data you mentioned, we are starting to get out more, but it’s still from just this very depressed level. So, it seems like things are bad, but the trajectory is good. They’re getting better.

Liz Laprade:
No, I absolutely agree and I think putting it in context is helpful. Yeah. Things are improving but if you look a year back from today, we’re still at depressed level, like you said.

Jeff DeMaso:
Well, this has been Jeff DeMaso and Liz Laprade from Adviser Investments thanking you for listening to The Adviser You Can Talk To Podcast. If you enjoyed this conversation, please subscribe and review our show. You can check us out at adviserinvestments.com/podcasts. Your feedback really is always welcome. If you have any questions or topics that you’d like us to explore, please email us info@adviserinvestments.com. Thanks for listening. Stay safe and keep others safe.