Lockdowns

   By Guest Blogger Ryan Lewenza

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During the spring when Covid rates peaked I was concerned for another wave in the fall as economies were reopening leading to increased human interaction and transmission of the virus and the colder fall/winter months would usher in the always challenging flu season. This is certainly paying out with daily new Covid cases surging to over 150k in the US and roughly 5K in Canada.

While I was correct about a second wave, I was off the mark on the impact rising Covid rates would have on reopening measures. I believed that Canada and other global economies would basically try to power through the increase in Covid rates given: 1) the medical field is much better equipped to deal with the virus with a better understanding of Covid-19 and with new treatments (e.g., using steroids for people with severe cases); and 2) the economic toll of lockdowns is just too devastating on local economies.

Well, this view is being greatly challenged as governments around the world are starting to implement different lockdown measures. For example, the Ontario government just announced that it was locking down most businesses in the Toronto and Peel region, New York is closing down schools, the UK is under full lockdown for 30 days and much of Europe is re-instating different lockdown measures.

So the question is, will these lockdowns lead to another major economic downturn similar to what we saw in the second quarter and will this derail our thesis for a return to global growth in 2021 and the end of this terrible global recession?

Daily New Confirmed Covid-19 Cases (7-day rolling average)

Source: European CDC

In the near-term we are likely to see a hit to the global economy with economic activity slowing over the next few months as a result of the lockdowns. For example, job growth, manufacturing activity and retail sales could slow, which could lead to some short-term volatility in the markets. However, if this were to occur we would view this as a buying opportunity as we don’t believe these lockdowns will derail the economic recovery resulting in a ‘double-dip’ recession. Here’s why.

First, in March and April it was estimated that three billion people were locked away in their homes as the pandemic exploded. No one knew how bad it would get or the impact it would have on our hospitals so governments just shut everything down by implementing extremely strict measures. With this virus and pandemic now being nearly a year old we know a lot more now and for better or worse we’re adjusting to this new reality of living with a pandemic. So I believe economic activity might slow as a result of these lockdowns, but it’s unlikely to be as bad as what we saw in the second quarter where the US economy contracted by an incredible 32% Q/Q annualized. This is echoed by JP Morgan economists who just lowered their GDP growth expectations for Q1/21.

Second, any lockdowns measures that are implemented will be temporarily until government officials see an improvement in the data. So we’re probably looking at a few months rather than a prolonged and uncertain lockdown.

Third, and critically, vaccines are coming and will start to be rolled out in the coming months. So if we can just get through this challenging winter then come the spring we should be in much better shape.

This week we got incredible news that Moderna’s Covid-19 vaccine is 95% effective, better than Pfizer’s initial projection of 90% for their vaccine (they updated their projection to 95% effectiveness this week upon completion of the phase 3 trial).

Specifically, Moderna’s phase 3 trial included 30,000 participants and an independent board examined the first 95 participants who got sick and ninety of them had received the placebo and only 5 were given the vaccine, which is how they derive the 94.5% effectiveness. Of the 95 who got sick, 11 experienced a severe case of the virus, none of which were vaccinated. Therefore the 5 vaccinated people who got sick only experienced mild symptoms. The read through of this is that the vaccine doesn’t just block the virus in most cases but also shields people who get sick from the worst outcome.

Similar to Pfizer’s vaccine, Moderna’s is an RNA vaccine so this now shows that RNA technology works well with these coronaviruses. Like Pfizer, Moderna will likely apply for emergency approval by the FDA within a few weeks and then they will start distributing in late Dec/Jan. First doses will go to people on the front lines (doctors, nurses, teachers etc.) and the elderly and we’re probably looking at Q2 of next year of a broader rollout of the vaccine.

The other big positives for Moderna’s vaccine are: 1) the vaccine can be stored in a freezer at -20 degrees versus Pfizer’s vaccine at -70 degrees; and 2) the vaccine can be stored in a refrigerator for 30 days compared to Pfizer’s at just five days. So this will help a lot in the distribution of the vaccine.

Overall, I see these recent vaccine announcements as a turning point in this historic pandemic and we’re getting much closer to being vaccinated and returning to normal, which I believe could come in the second half of 2021.

Finally, if I’m wrong about the economic impact of these lockdowns and wave two turns out to be far worse than I currently anticipate, we have the prospect of a new US president come January, which I believe will be the catalyst for another US stimulus package in the coming months.

How big of a stimulus package will depend on who wins the Georgia run-off Senate elections and therefore who has majority in the senate come January. If the Democrats pull out a win in the run-off elections then expect an even larger package given they will control all chambers of congress. January could prove to be an important month for US politics and the direction of the US economy in 2021.

I tend to be a ‘glass half full’ kind of guy and while I’m quite concerned about the increase in Covid cases and escalating lockdown measures, I remain steadfast in my belief that the global economy will emerge from this terrible global recession in 2021 and that the global equity markets will continue to climb a wall or worry.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.

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