The S&P 500 took a 3% hit this week as daily COVID cases hit all-time highs and the Federal Reserve put in restrictions on banks after a stress test this week. However, COVID hospitalizations and deaths have not seen a parallel spike and consumer spending jumped a record 8.2% in May. How should we interpret this information? Here are the details:
- 📉 The Federal Reserve capped dividend payments and suspended share-buybacks for banks in order to preserve capital. On Thursday, the Fed voted to require large banks to preserve capital by suspending share repurchases and cap dividend payments in the third quarter. The traditional stress test done in February before the pandemic showed that banks remained well capitalized, but the Fed is taking precaution given current conditions. The market reacted poorly as it seemed like the Fed was preparing for worse to come, but a deeper look indicates the Fed is just taking precautions in a worst-case scenario.
- 📉 The U.S. hit a record high daily number of COVID cases this week with more than 45K new cases, resulting in select states to pause reopening plans. Texas, Florida, and Arizona paused reopening plans this week due to rising COVID cases. This has raised concerns among investors that other states will follow a similar path. If so, this could result in significant damage to the economy and hinder the market recovery we’ve seen in the past month. While this is concerning, it is promising to see these cases are isolated and northern states have seen a continued decline in cases, even in the past two weeks. On Thursday, Governor Cuomo announced that New York saw the lowest levels of COVID-related hospitalizations since the beginning of the COVID crisis. Therefore, it is unlikely that the majority of states would pause reopening plans or roll-back reopening progress.You can see the number of daily COVID cases by state in this Johns Hopkins University link.
- 📈 While COVID cases are spiking, COVID hospitalizations and deaths still on the decline so far. COVID cases are spiking, and the median age of positive cases have dropped significantly. In the case of Florida, the median age for COVID cases dropped from 50 to 33 in recent days, meaning the infections are occuring in the less vulnerable population. As a result, we have not seen a parallel spike in hospitalizations and deaths. However, this likely means a much greater pool of asymptomatic carriers exists and may spread it to a more vulnerable population, especially with the upcoming 4th of July. It will be critical to keep an eye on the number of hospitalizations and deaths for the coming months.
- 📈 Finally, consumer spending jumped a record 8.2% in May, a positive indicator of economic recovery as Americans are able to spend as states reopen. Consumer spending leaped a record 8.2% in May indicating confidence in the economy. The reopening of businesses in May allowed pent up demand to be released. This is promising for our economic recovery as small businesses depend on this uptick in spending for survival. We will need to see if spending continues to return back to normal if government stimulus subsides next month.
WX Capital believes that the markets will continue their recovery after 1 – 2 months of uncertainty. Rising COVID cases are certainly concerning, but it's promising that hospitalizations and deaths related to COVID are still on the decline in the U.S. However, with 4th of July coming up and the economy reopening, there is a concern that a large number of asymptomatic carriers will transmit COVID to more vulnerable groups. Hopefully, with increased testing, new treatment options, and proper social precautions, we will see hospitalizations and deaths mitigated. As usual, we have maintained the vast majority of our positions in biotech as a natural hedge against the COVID-impacted markets. Please don't hesitate to reach out with questions!