Daily Comment (September 28, 2020)

by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA

[Posted: 9:30 AM EDT] | PDF

It’s Monday, the last week of September, and the end of Q3.  Equity markets are in full recovery mode this morning.  We start our coverage with a comment about the election situation.  World news comes next, with a focus on Nagorno-Karabakh.  China news is next, followed by the pandemic update.  We close with economic news.  Here are the details:

Election news:  Over the weekend, President Trump nominated Amy Barrett to the Supreme Court.  She has been on the “short list” for some time and will be controversial.  Although it appears that she will be approved by the Senate, the testimony could be newsworthy.  Tomorrow, the first presidential debate will be held.  Debates have the capacity to change elections; President Ford’s gaffe that communist Poland was free may have sealed his defeat.  President Reagan’s line against Carter stating “if you are better off now than you were four years ago, you should vote for him” was a key moment.  VP Gore’s insufferable huffing in the first debate with Bush did him no favors.  Tuesday night will be important.  Foreign interference in the U.S. election process is expected; one way this is done is by planting false stories and relying on the domestic media to repeat the narrative.  A deeply divided country increases the power of such disinformation.  Investors are building hedges for November.  Finally, the NYT has received multiple years of President Trump’s taxes.  That should be a topic for tomorrow night.

Nagorno-KarabakhThis disputed region between Azerbaijan and Armenia is one of several “frozen conflicts” in the world; this one emerged after the end of the Soviet Union.  We wrote on this issue in 2016 during the last major flareup.  It isn’t clear how this weekend’s fighting started.  Both nations have declared that martial law and military mobilizations are underway.  Although border skirmishes are not unusual, this one has escalated rather quickly.  The U.S. has indicated it may try to end the violence, although Russia usually intervenes to end these confrontations.  Given the unsettled conditions of the region, however, this battle may have more “legs.”  A full-blown war could cut off oil from the Baku region, which might support oil prices.

World news:

 China news:

COVID-19:  The number of reported cases is 33,137,748 with 998,372 deaths and 22,952,164 recoveries.  In the U.S., there are 7,116,456 confirmed cases with 204,762 deaths and 2,766,280 recoveries.  For illustration purposes, the FT has created an interactive chart that allows one to compare cases across nations using similar scaling metrics.  The FT has also issued an economic tracker that looks across countries with high frequency data on various factors.


  • Europe is facing rising infections, including Spain and the U.K. However, so far, hospitalizations are not tracking levels seen earlier this year.  It isn’t completely clear why.  It could be that the virus is mutating into a less virulent form.  If infections are mostly affecting the young, they tend to be more resilient.  As long as hospitalizations remain low, there is less need for extensive lockdowns.  Some restrictions are likely, and rising infections will lead some households to exercise greater caution, dampening economic growth.
  • China is rapidly expanding its vaccine distribution for vaccines that haven’t been tested to Western standards. This decision could boost immunity if they work, but if there is a problem with the vaccines, those injected could be harmed.
  • One of the mysteries of COVID-19 has been how children have generally been unaffected by the virus. Influenza, for example, tends to affect the youngest and oldest of those infected most adversely.  One clue may be in the immune system differences between children and adults.  Children’s immune systems are new, and their systems tend to react quickly and strongly.  Adult immune systems are more selective; after years of fending off various viruses and bacteria, adults tend to rely on less aggressive but more targeted responses.  Researchers are postulating that since COVID-19 is novel, the child’s immune response has been more effective than the adult system.  For this reason, children may be last in line for a vaccine.
  • Blood banks are mobilizing to encourage those who have recovered from COVID-19 to consider plasma donations in a bid to create antibody therapies.
  • And, sadly, an American tradition may be at risk; as school systems become more adept at online learning, the snow day may be lost.

Economic and market news: 

  • In March, the Fed took aggressive steps to backstop numerous markets, including high-yield bonds. It appears its actions have reduced the number of bonds expected to be downgraded to “junk” after they were initially rated investment grade.  However, risks remain, with the focus on commercial real estate.  New reports suggest commercial properties may have lost a quarter of their value.  We also note that there have been no loans forgiven as part of the PPP program.
  • There is a surge of new business formation. Some of this is probably due to necessity.  Many of the layoffs are occurring in industries that won’t be coming back soon, so workers are striking out on their own to build new careers.  In other cases, there is a bet that fundamental changes are occurring in the economy, and these budding entrepreneurs are trying to “ride the wave.”  The rise in business formations is a testament to the flexibility of the American economy; although most of these businesses will fail, some won’t, and those that survive will lay the groundwork for a stronger recovery.
  • In a reversal of “just in time” inventory management, grocers are building stockpiles before winter. Increased holiday purchases and the fear of disease (COVID-19, influenza) are raising concerns about the reliability of supply chains.  In fact, we suspect this is a broader issue for the economy going forward.
  • As the utility shutoff moratoriums end, a surge in shutoffs is likely.
  • Apple (APPL $112.28) and Alphabet (GOOG, $1444.96) are facing a lawsuit over antitrust regarding how they manage their app stores.

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