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Contemplating a Reopening

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As the number of COVID-19 cases rose above 2.4 million worldwide on Monday Brian Belski, Chief Investment Strategist at BMO Capital Markets, moderated a roundtable discussion with BMO experts to discuss the latest developments in the outbreak. Joining him on the call were Michael Gregory, Deputy Chief Economist at BMO Capital Markets and Steven Bell, Portfolio Manager & Chief Economist at BMO Global Asset Management. Special guest Dr. John Whyte, Chief Medical Officer of WebMD, joined the call to discuss the week’s most recent medical developments.

BMO COVID-19 Insights podcast is live on all major channels including AppleGoogle and Spotify.

Dr. Whyte opened the call to say that as the curve of the outbreak starts to flatten in North America, the United States has laid out guidelines for a phased reopening of its economy, as early as this week in the case of some states.

As of April 20, there were over 2.4 million cases of coronavirus reported globally, with some 166,000 deaths.

In the United States, there had been some 760,000 cases of COVID-19, with over 40,000 people dying from the disease, nearly half of them in New York State.

In Canada, there have been 34,786 cases reported to date, with about 1,580 deaths, with the majority of cases and deaths in Quebec and Ontario.

“In Canada, there actually seems to be a flattening of the curve. For the number of cases and the number of deaths, the rate has decreased, and we’re also seeing some of that in the United States, but it does differ by region and locality, said Dr. Whyte, who prior to WebMD served as the Director of Professional Affairs and Stakeholder Engagement at the Center for Drug Evaluation and Research at the USFDA.

Trump guidance

The numbers are encouraging, Dr. Whyte said, leading President Donald Trump last week to unveil guidance for a phased reopening of the US economy. In an 18-page document, the guidance leaves the ultimate decision about whether or not to reopen to each state governor, but provides some preconditions.

First and foremost, before reopening, states must be able to show: a downward trajectory in the number of confirmed coronavirus cases; sufficient hospital capacity to treat patients; to have a robust testing program in place, including antibody testing for at-risk healthcare workers; and to have a proper contact tracing plan in place.

Reopening will occur in three phases. Under Phase I, existing measures stay in place whilst allowing certain businesses, including gyms, to reopen if social distancing is possible. As well, some elective surgeries can proceed. Under Phase II, states and regions with no evidence of a rebound of COVID-19 can allow non-essential travel to resume, schools can reopen and large venues and bars can operate with diminished seating. Phase III, recommended only for states that have shown no signs of a spike in cases, would allow for public interactions to resume, including visits to nursing homes. It would also allow bars and restaurants to expand their capacity, and for employers to resume unrestricted staffing in the workplace.

“A couple of states have already started to talk about when they might lift guidelines. Idaho and North Dakota have advised non-essential businesses to prepare for a phased reopening, starting May 1. Montana is going to begin lifting restrictions on April 24,” said Dr. Whyte in citing some examples among others.

“I really think we can see a light at the end of the tunnel, but we have to move carefully and deliberatively and need signs to guide that, and it’s going to be iterative,” said Dr. Whyte. “We are going to have some bumps, some ups and downs, but I think we are finally starting to bend that curve and talking about how we start to resume some sense of normal.”

A Dark Tunnel

Deputy Chief Economist Michael Gregory acknowledged signs of a light at the end of the tunnel, but cautioned as well that, “We’re also getting a picture of just how dark and gloomy that tunnel is from an economic perspective.”

Data released over the last week, he said, point at the weakest economy experienced since the Great Depression.

Canadian Economic Data

In Canada, just in the month of March, there was a 9 percent decline in GDP, he said,  which will result in a 2.6 percent decline in GDP in the entire quarter and an annualized rate of more than 10 percent.

“That's going to turn out to be the weakest quarter that the Canadian economy has experienced since quarterly data began in 1961,” Gregory said.

The second quarter will be even worse, he said, because while March was a pretty rough month, it started out normally, with physical distancing and business closures only put into full effect as the month unfolded.

Gregory said he anticipates Canada to exceed its previous post-war high unemployment rate of 13.8%, and he has adjusted the overall GDP growth for the year to a contraction of 6 percent, from 4.5 percent.

United States Economic Data

In the United States, retail sales were down 8.7 percent in March, in the worst reading on record since it began keeping records in 1967, despite some anomalies.

“It's very interesting that despite the very poor headline number,” Gregory said, “some sectors within the retail category actually did a bit better.” These included record increases for food and beverage stores, health and personal care stores, as well as general merchandise stores like Costco – all due to the initial panic stockpiling.

In the worst reading since 1947, industrial production was down 4.7 percent in March and housing starts dropped 23 percent.

“And, again, keep in mind,” Gregory said, “all of these poor numbers for March reflect the fact that the month began in pretty decent shape, and only set in as the month unfolded and began to weaken.”

In addition, 22 million Americans have applied for unemployment insurance benefits in the past four weeks, “and that is surely going to hoist the unemployment rate into double-digit territory for April,” he said, “likely above the previous post-war high of 10.8% which was hit in 1982.”

“We took another little slice off our forecast for growth for the full year,” Gregory continued, “We now look for overall GDP growth in the United States to decline, on average, 5 percent this year, down from our previous call of a 4 percent contraction.”

As harsh as the downturn has been, Gregory said North America can expect a robust rebound in economic activity once businesses start to reopen, buoyed by the fiscal and monetary stimulus measures put in place in Canada and the United States.

“Coming from the very low basis we have, we will see pretty strong economic growth to start off that recovery and I think that that's the main message here, that light at the end of the tunnel is not only about social and physical distancing, it's also the chance to begin to see the economy growing again.”

Weaknesses in the Euro System

Steven Bell, Portfolio Manager & Chief Economist at BMO Global Asset Management, said the COVID-19 outbreak is shining a light on some of the weaknesses of the Euro system, like Italy, which needs massive fiscal stimulus but does not have its own currency, meaning constrained spreads on Italian bonds.

“Europe is our least favorite region as far as equities are concerned,” said Bell, “Much, much less attractive to us than the United States.”

He pointed, for example, at a much more muted policy response in continental Europe than the United States. Yes, the European Central Bank has been highly active and innovative, said Bell, but the response by the US Federal Reserve has been even bigger and bolder.

A Second Wave

Some countries in Europe moved quickly to contain the coronavirus outbreak and are starting to talk about reopening their economies, but Bell said the big test for the region will come in the next two to three weeks when experts are expecting a second wave of infections.

“If it’s small and easily contained, all will be well. If it’s big and requires full lockdowns to be re-imposed, that will be quite a dismal scenario,” he said. Importantly, how the reopening is handled in Europe will likely be seen as a bellwether for the United States as it looks forward to relaxing restrictions to contain the virus.


Despite fairly limited fiscal stimulus, Bell said China’s equity market has surprised to the upside and is one of the world’s best performers year to date.

That, “almost certainly reflects official support from government-controlled and government-influenced institutions that have been wading into the market,” Bell said.

“All in all, Europe and emerging markets have suffered very badly from this dreadful crisis,” he said. “The world, well it may never be the same again.”

North American Markets Favored

BMO Capital Markets Chief Investment Strategist Brian Belski pointed to the continued relative strength of North American markets vis-à-vis counterparts in places like Europe.

“At least in the near term, let’s say for the next three to six months at least, we will continue to favor what we're seeing in terms of what we believe is the relative stability of North American markets, not only the United States I think but also in Canada,” he said.

“We continue to believe that Canada is a value proposition to the US,“ he added, noting that Canadian markets have been keeping pace with the United States, which typically it does not during times like this.

Belski said he maintained his belief that the S&P 500 touched its pandemic-related low on March 23, although the road ahead will remain bumpy. He pointed, for example, to earnings results reported so far by companies in the S&P that feature a lot of “front-end loaded” negativity.

“The stock market is telling you that things are probably going to be better than a lot of the forecasts out there, (but) not doubting that there's going to be very bad earnings and very bad economic data,” he said.

“Yes, we are going to see a new normal type of activity, we are going to see a change, but we would never, ever bet against the wherewithal of the US consumer in terms of trying to come back.”

Read more
Brian Belski Chief Investment Strategist
Michael Gregory, CFA Deputy Chief Economist and Managing Director
Steven Bell Portfolio Manager & Chief Economist, Multi Asset Solutions, BMO Global Asset Management

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