Hotspots and Cold Spots
Rising case numbers in the US don't seem to be upsetting the markets. No-one seems to care in the US. One colleague got a text from a cousin in Washington DC yesterday saying that "everyone is just getting back to normal and they'll handle the virus if they get it". Here we are in Victoria with no loo paper again, a couple of hotspots and another text to a friend of ours, from a girlfriend they are going to visit in Sydney at the weekend, telling them they can't come and stay because her boyfriend is concerned that they are from Melbourne. As Melbourne fund managers, we may just be missing the point that globally, especially the US and Europe, are re-opening their economies and nothing is going to stop them.
And there is something else we maybe haven't worked out – that the virus is a "hotspot" thing – averaging cases across the US and expecting the whole US market to suddenly take notice could be another mistake, because the virus case number concern is not a 'country' thing, it is a state thing. In some states, the virus has gone cold – which suggests that it can be contained – and in other states, it is taking off again.
Which means that the 'whole' stock market is not going to suddenly respond, it is reacting incrementally every day to the situation in each state, each industry and each business. The hotspot nature of the virus also means that:
- Management is up to local government, not the federal government (as we have seen in Australia). So don't expect the federal government to make big calls, they want the country to re-open, and politically they have to promote re-opening (where possible), but, on the ground, management of the virus is going to be delegated to the state governments, then local government, with decisions made in the hotspots by businesses, employers, and eventually individual households, when there is a flare-up.
- It obviously can be contained with proper management, that has been proven, so the game now is to manage hotspots, on a localised basis. That means a few things:
- There will be no precipitous federal government decisions that collapse the stock market in one go. It is out of Federal government hands – Trump, Boris and Scott Morrison are irrelevant. They are there to facilitate stimulus measures on a Federal level, and most of those cards have been played. They all want economies to re-open, but they are not managing the virus.
- The virus's impact on businesses will be geographically specific, localised not universal. Apple may close in Florida but stay open in New York.
- Analysts will have to take account of the exposure of specific companies to hotspots when they are forecasting earnings – so success or failure can be a geographic, company specific thing.
- There will be winners and losers, and those unaffected, and it will have to be determined on a company-by-company basis.
- We probably need to stop worrying about a general "relapse risk", because there are now only local relapse risks. New York is not going to go into lockdown again because Florida cases are up, for instance. And the whole of the US is not going to go into lockdown again because total cases are on the rise.
- If virus management is broken down into hotspots and cold spots, the stock market is not going to repeat the February collapse unless the virus is out of control globally, but it never will be if it is a localised thing.
- The virus can be managed if the effort is made – which is as good as a vaccine.
So maybe we worry too much. The virus may damage the economy relentlessly for years, but another big unexpected 'moment' is unlikely. We now know about the virus, how to manage it if needed, and it will not shock the market again, even if there is a relapse (which there is in some places).
Despite that, it is interesting to see that precipitous moment two weeks ago, and that 400 point drop in the Dow Futures mid-session yesterday on the story that the trade deal "is over" – which apparently it isn't. Trade does matter it seems. The drops highlight the 'spookable' nature of the markets at the moment. It is a herd, it can move fast, it can be precipitous, but the point is that the headless moment in March, built on virus panic, is unlikely to repeat because we have processed the virus and it is unlikely to shock us again on a grand scale, just a local scale.