Getting America Back to Work

Jack Ablin Market Commentary

With our nation in the throes of dealing with COVID-19 from both public health and economic perspectives, as investors we need to understand the bigger picture. We believe gaining an understanding of the investment implications of the pandemic is a three-step process. The first step: tracking COVID-19 itself, because nothing else can happen until after infections have peaked. Recent data suggests that the rate of growth in infections in the US is flattening.

The second step is understanding the economic impact the virus, quarantining and social distancing will ultimately exact. We know that nearly 17 million Americans have filed for unemployment benefits over the last three weeks, dwarfing the 8.7 million jobs lost in the Great Recession of 2008. Economists estimate that US GDP could shrink at an annualized rate of 30 per cent in Q2/20 as a result, a degree of contraction not seen since the Great Depression. COVID-19 has already caused a 20 per cent reduction in US output, suggesting around $350 billion in lost production each month. The big difference, however, between the pandemic and the Great Depression is that the 2020 COVID-19 pullback could last a quarter or two, not years as it did in the 1930s.

The third step in gauging the investment implications of the pandemic is understanding the impact on corporate earnings. While government policy responses worldwide will cushion the blow, it’s too early to estimate profit trends and market implications.

Getting Americans back to work is critical to restarting the economy. It’s encouraging to hear lawmakers discuss the possibility of moving beyond the lockdown. While President Trump has targeted May 1, current estimates suggest that any meaningful reopening is unlikely to occur before May 20.

Several studies have laid out frameworks for gradually returning employees to the workplace, the most thoughtful of which originated in Great Britain. It is a guide to determining who could begin to resume normal business activities and who needs to remain isolated. Their approach seeks to partition its population into four categories: “susceptible,” “exposed,” “infectious” or “recovered”, which are further subdivided by age, gender and occupation.

Note in the above graphic a gradual decline in the susceptible population as infections increase. The pace of the transition from “susceptible” to “recovered” depends on the length and extent of social distancing restrictions. Once distancing restrictions are relaxed infections subsequently increase, but its adverse impact is muted by size of the “recovered” population.

A US model designed by the American Enterprise Institute (AEI) evolves in four phases. “Phase II” involves opening schools, universities and businesses, encouraging continued teleworking, and limiting social gatherings to no more than 50 people. Older adults and people with underlying health conditions would remain isolated. Like the UK plan, the AEI model seeks to identify those who are immune so they may return to work, serve in high-risk roles (such as the front lines of health care) or serve in a community support function. The plan shifts to “Phase III” once a vaccine is developed or effective palliative treatments are developed for those who are infected.

Several common themes underlie the many diverse plans that strive to gradually reopen the economy, including testing and tracking. Tech giants Apple and Google are collaborating on phone apps that could help healthcare administrators track contacts with infected individuals to cast a wider isolation net. Diagnostic testing of two types is also essential before economic emergence can take place. One type is a polymerase chain reaction (PCR) test which can detect COVID-19 before a person has symptoms, and would be the best way to identify who is infected. Ideally, the PCR test would be administered locally with results available in minutes, not days. The second type of test is a serum antibody test, which detects antibodies that the immune system has produced to fight COVID-19. The antibody test helps determine who has already been infected and is unlikely to contract COVID-19 again, or spread it. By administering these two tests, policymakers would be able to quickly categorize their populations into the four categories the British plan envisions. The desire of most plans is to identify the recovered portion of the population who possess specific antibodies and issue “immunity passports” that would enable them to return to their jobs and to move about more freely. Health care workers with immunity passports could work without fear of contracting the virus from those they are treating.

The good news is science is trying to keep pace with economic urgency. PCR tests are in development and should be available soon, according to The Wall Street Journal (WSJ). Pharmaceutical companies Abbott and Roche are developing PCR tests that decrease results turnarounds to minutes. The antibody test, the key puzzle piece in issuing immunity passports, is currently available but its results aren’t perfect. Great Britain, after purchasing millions of antibody tests from Southeast Asian suppliers, found that they were unreliable, illustrating the challenges of developing such tests. According to the WSJ report, British drug maker AstraZeneca is working on an at-home antibody test that could be used to check for immunity. While doctors and scientists are hopeful that antibodies provide a degree of defense against reinfection, it’s too early to tell how complete that protection is or how long it would last.

Though more time is needed to roll out reliable testing, we believe lawmakers can take baby steps to open the economy sometime in May. It’s heartening to know that scientific progress on COVID-19 is being made, but it’s frustrating to realize that science operates at a slower pace than do economies and markets.