Don’t open up the US economy again too soon, say investors

Boston/New York — US President Donald Trump’s desire to rapidly re-open the economy despite signs the coronavirus is still spreading may backfire, with higher deaths and citizens remaining fearful of going out, some investors have said.

US markets have been roiled by the spread of the virus in the country and as states have shut parts of their economies. Trump said on Monday that at the end of a 15-day shutdown period, which would run to the end of the month, “we will make a decision as to which way we want to go”.

Last week, Trump urged Americans to halt most social activities for 15 days. It is unclear what power Trump actually has to simply turn the economy back on by executive order.

News of Trump opening up the US economy any time soon would not be taken well by investors, who remain anxious about the coronavirus’ uncertain trajectory and its economic toll, said Axel Merk, chief investment officer of Merk Investments. “Markets will react badly because they have learnt that this approach doesn’t work. From a medical point of view, you have to break the exponential growth and you do that with shelter-in-place policies.”

The S&P 500 Index sank 3% on Monday. It is down more than 30% from its February 19 peak and is at levels not seen since the end of 2016, giving up nearly all its gains made prior to Trump being elected.

Bleak estimates

Initial estimates of the pandemic’s economic fallout have grown bleaker in recent days. US unemployment could hit 30% and second-quarter economic output could be half the norm, St Louis Federal Reserve president James Bullard said.

Jennifer Pline, head of wealth management for Cambridge Trust in Boston, said it is too soon to judge whether to re-open the economy just yet. “As we’re just starting to close things down fairly tightly, we need to wait a while until we get more traction and less contagion with the virus.”

The cost of a mistake could be deadly. A March 16 study by Imperial College in London predicts 2.2-million deaths in the US — in the unlikely case of an entirely unmitigated epidemic — with critical care bed capacity exceeded as early as the second week in April.

Economists at Northwestern University and Berlin’s Freie University estimated an “optimal containment policy” in the US would deepen the subsequent recession but save 600,000 lives.

Ellis Phifer, market strategist for Raymond James in Tennessee said he has struggled with the question of whether it would be best to re-open parts of the economy.

“It’s really hard to determine which costs more,” Phifer said of the dueling approaches of lifting restrictions sooner or later. On balance, he would be inclined to follow the advice of public health experts, such as Dr Anthony Fauci, director of the US National Institute of Allergy and Infectious Diseases, who have largely advocated for more restrictions.

Testing is key

In an interview last week, Richmond Federal Reserve president Thomas Barkin said any call to try to resume normal economic activity will depend on widespread testing quick enough that businesses can establish protocols to ensure worker and customer safety.

David Kotok, chair and chief investment officer of Cumberland Advisors, said it is imperative to get accurate antibody tests, and to read the recovery rate as well as confirmed cases and deaths. “I don’t think the market will get the economic growth if people are dying all over the place.” 

Others thought that the more important thing would be to get the economy back open. “You leave this USA shut for another 60 days and you may have no economy or healthcare left,” said John Lekas at Leader Capital.

Rob Arnott, founder of asset manager Research Affiliates said the toll of job losses and other economic hardship that may stem from shutdowns and other measures could potentially be more harmful than the virus itself. “Our way of handling this will kill a lot more people than it saves.” 

But now the measures are taken and the population is fearful, there may be no going back.

Gregory Daco, chief US economist at Oxford Economics, said even if the lockdowns were lifted, “businesses and households would remain very cautious, and financial intermediation would remain under stress ... And, with the rest of the world under lockdown, you would presumably further alienate yourself”. 

Reuters