Lockdown-Related Market Risk is High and Rising

By John Banks

The U.S. stock market has benefited, tremendously, from a belief that the Federal Reserve will support the market at all costs.

It has also benefited from a belief that, whatever happens next with the pandemic, the worst is over from an economic perspective. Investors are eager to put COVID-19 behind them.

What happens, then, if multiple U.S. states implement new lockdowns, as hospital systems threaten to be overwhelmed (again) as COVID-19 fatality rates rise?

“Up until now the U.S. has been rewarded because of expectations that we wouldn’t see any kind of significant lockdowns even if infection rates grew,” Invesco’s Chief Global Market Strategist Kristina Hooper told CNBC on Wednesday.

“But the reality is that when the hospitals fill up and there are no more beds, then governors are forced to impose new lockdown measures.”

We agree and have said as much in these pages. Nor is this a hypothetical possibility. ICU beds are filling up across the Sun Belt.

“At least 56 intensive care units in Florida hospitals reached capacity on Tuesday,” CNN reported this week. “Another 35 hospitals show ICU bed availability of 10% or less, according to the Agency for Health Care Administration in that state.”

When the hospitals overflow, treatable ailments become fatal. In a jammed-up hospital situation, it isn’t just COVID-19 that can kill, but routine ailments like heart attacks and strokes.

This is because patients can’t get a bed, or an attending physician, or an ambulance — or they fear going to the hospital in the first place, knowing the virus is there.

It is also because, when hospital capacity is full to bursting, medical staff find themselves used up and exhausted to the point of burnout. There aren’t enough nurses and doctors to go around.

The coronavirus case numbers in Florida are exploding right now. This is very bad, because exponential growth feeds on itself, which means high numbers beget even higher numbers at a dizzying pace.

Nor is it just Florida. It’s the whole Sun Belt. On July 8, the United States saw a record 62,147 new daily cases. The prior peak in April was 35,901 cases.

We are on the way to doubling the April peak, in terms of new cases per day, and there are credible estimates the U.S. could see 100,000 new cases per day. 

Is this just a matter of higher testing rates? No. The hospital beds are filling up. That wouldn’t be happening if the daily case numbers were old news. We are seeing an exponential rate of spread.

Then, too, we noted recently in these pages that COVID-19 deaths are likely to lag new cases by roughly four to six weeks, because that is about how long it takes to go from symptoms to hospitalization to a reported new death.

That, in turn, meant the declining U.S. death rate was likely to start trending upward in the end-of-June to early-July window, on a four-to-six-week time-lagged basis from America’s late May reopening.

Sure enough, on July 7 and 8 — the latest data available as of this writing — the reported new COVID-19 deaths per day in the United States were 922 and 897 respectively.

Excluding a spike on June 25, when the state of New Jersey adjusted its reporting methodology, those were the highest numbers in a month. The trend is turning upward again, as the impact of a premature reopening rolls through the system.

Then, too, the state of Arizona is now the No. 1 COVID-19 hotspot for the entire world.

In a New York Times ranking of “World’s Worst Outbreaks” for COVID-19 at the present moment, the top three spots are filled by Arizona, Florida, and South Carolina respectively.

Bahrain is fourth, but Louisiana then comes fifth. Qatar and Oman are the only non-U.S. states in the top 10 besides Bahrain, and Alabama, Nevada, and Mississippi round out the list. Texas and Georgia are 11 and 12.

Meanwhile in Houston — another state where the hospital system is under severe strain — a significant number of COVID-19 patients are dying at home, according to a review of Houston Fire Department data by NBC News and ProPublica.

“The previously unreported jump in people dying at home is the latest indicator of a mounting crisis in a region beset by one of the nation’s worst and fastest-growing coronavirus outbreaks,” NBC reports. The Houston pattern has echoes of the New York City outbreak in March and April. 

Amid all of this, there is a hope that U.S. schools will reopen en masse in August and September.

The closure of school systems has made it painfully clear how important schools are to a functional society, in terms of both well-being for children and parents’ ability to work.

But it isn’t clear a mass reopening of schools is even possible.

We still don’t know enough about virus transmission effects — there is growing evidence the virus is airborne — and the schools themselves lack the preparation, and the funding, to COVID-proof their classrooms.

On July 9, the New York Post reported that Kamp Kanakuk, a Missouri sleepaway camp, had to end its K-2 camper program after dozens of staff and campers (young children) came down with COVID-19. At last count, at least 82 campers and staff were infected. That is not a good sign for school reopenings.

At a minimum, U.S. schools will need to take greater steps toward COVID-proofing their classrooms, protecting teachers and staff from the risk of infection, and protecting kids from infecting each other.

This hasn’t been figured out yet. Nor do most public school systems have the funds on hand to pay for it. The school systems in Europe that managed to reopen successfully worked through these issues months ago, and are now enjoying the benefits of advance planning and proper funding. The U.S. school system has neither of those. We had a window to prepare. We didn’t take it.

None of this should be political. It is about math, science, and the threat of hospital systems being overwhelmed. It is also about the threat of serious long-term effects from COVID-19 complications, like neurological damage or lung-tissue scarring. 

The threat to equity markets, and to consumer psychology, comes with the potential impact of new rolling shutdowns across multiple states, and the hit to investor sentiment that could come from a resurgent uptrend in COVID-19 fatality rates.

The markets, thus far, have been able to ignore the economic impacts of a largely failed reopening, on top of an ongoing real-economy crisis, via hopes that the Federal Reserve and good, old-fashioned optimism would power us through. There is real risk of another severe decline, if not a full-blown market meltdown, when those hopes get dashed. The danger is right in front of us now.