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MR. MICHAEL CEMBALEST: Good morning. This is Michael Cembalest with the July Eye on the Market podcast. So what’s happening now is the world’s recovering pretty rapidly from the pandemic. Roughly half of the 17% hit to GDP that took place in the spring has now been reversed--manufacturing and service sector, surveys are rising just about everywhere. The U.S. employment report beat expectations on new jobs--around 5 million new jobs--and the unemployment rate, which fell to 11% from 16%.
The recovery in the leisure and hospitality sector is particularly a good sign, given the impact on those sectors from the pandemic. And when we look at our proprietary measure of hotel and restaurant credit and debit card spending, they track the job growth pretty well. And from what we can see from the spending trends, the job numbers are continuing to improve.
And then most importantly for investors for profits, there seems to be a lot of operating leverage at work. And this is something we cover in today’s Eye on the Market. Essentially, after a recession, companies are able to generate outsized profits with very small revenue increases by managing expenses very aggressively. And we’ve got a chart in here that shows that after the S&L crisis, the long-term capital crisis, the tech bubble, the global financial crisis, and the oil collapse a few years ago, the vast majority of earnings growth took place from operating leverage rather than sales growth in the four quarters after a recession.
So take a look at that. And essentially what we’re seeing is that all of the economic growth in payroll and profit numbers have positive momentum. And the only thing that appears to be able to unravel all of that is the fact that the United States is now running the third highest infection rate in the world when you look at the countries that make up around 90% or 95% of global GDP. Only Chile and Brazil are running faster infection rates right now.
So there have been some state countermeasures, like shutting down gyms, bars, museums, and some indoor dining. But most of the countermeasures in the states have been pretty mild relative to the restrictions that were imposed earlier.
And what’s changed--and I’ve been waiting to record this podcast for a few weeks, because what’s changed is that a couple of weeks ago, we saw rising infections, but we didn’t see any increase in hospitalizations or in deaths. And there were some theories floating around that were, well, it’s mostly young people that are getting sick right now--that are being infected right now. There’s also more testing, so with more testing and more young people circulating, that’s how you get higher infection rates without higher hospitalization and death levels.
You know, there’s a lot of theories out there. We weren’t sure about that, so I wanted to wait a couple weeks to see what would happen. And the answer is mixed. Hospitalizations are now rising as well in tandem, particularly in the hot spot states, as epidemiology would suggest that it would. On the other hand, there’s also evidence--and not every state publishes information on this, unfortunately. But there’s evidence in places like Tennessee that the increase in the recent population of people getting infected are younger, and therefore are posing less risk for Tennessee hospitals.
So there seems to be a little bit of everything going on. Younger people are getting infected, but more people are getting infected in some of these states anyway and ending up in the hospital. And also, more people are getting tested. But the bottom line is that the testing spike does not explain what’s happening in some of these hotspot states, because a bunch of other states have similar testing rates, and their infections are not soaring.
So cutting through all of the data, it seems like the state governors have absorbed the blow of the rising infections and hospitalizations with some minor countermeasures and are relying on continued declines in stability and death rates for now to remain open. If that’s the case, the U.S. economy and equity markets may continue to gradually rise in the months ahead as we get through the summer. So that’s where we’re going to be focusing.
Now, deaths may be stable, simply because of a time lag, and it’s only a matter of time before they increase. I’m tempted to think that everything that the healthcare system and doctors have learned about anticoagulants and corticosteroids and things like that are also playing a role in reducing the mortality risk for severely ill patients. So there’s a little bit of everything going on. For sure, the death rates--I’m sorry, the infection and hospitalization rate spikes are extremely concerning. But until we see the death rates rise as well, there’s a good chance that the governors will not take significant steps to reverse the reopenings that have taken place so far.
The big question that I really find myself asking a lot is, why has this--why has the U.S. had this spike in infections that almost no other countries have had, certainly no other developed countries, at this point in the process? There were a lot of high infection spikes a couple months ago. But the rest of the developed world and much of the developing world figured out how to shut down this pandemic, and the U.S. has had a very difficult time and, as I mentioned earlier, is running an extremely high infection rate.
There’s not a lot of easy answers. We’ve looked at reopening dates and mobility changes--in other words, how many people, based on Google and Apple smartphone app tracking, going to restaurants, retail establishments, transit, workplace, et cetera. Mobility changes, reopening dates, other behaviors don’t lead to consistently higher infections in any statistically meaningful way. I mean, you can find examples of when they do, and you can find a lot of examples of when they don’t. And so this pandemic has defied a lot of efforts to neatly define the kind of behaviors that lead to the spikes in infections. New York’s a good example. It reopened a little over a month ago. And both the testing rates and the infection rates and the death rates just continue to fall, in stark contrast to places like Arizona.
So I wanted to take a look at other ways of maybe explaining this uniquely American virus surge and just wanted to share some of these findings with you. So most people know that the U.S. is really a leader in biomedical research and patents, and more than half of the top 40 universities for clinical medical research are in the U.S. And despite all of this, Americans themselves rank below most of the rest of the world on things like, are you interested in learning more about science; do you trust science; do you trust science advice from government agencies; do you believe in the importance and safety and utilization of vaccines. There’s a lot of polling results that show that the U.S. ranks in the bottom third on all of these things around the world.
The U.S. also ranked second lowest among around 35 countries with respect to belief in whether humans developed from earlier forms of animals. According to the National Science Foundation, over a third of Americans believe that astrology is either very scientific or at least sort of scientific. And there’s just a lot of evidence showing that Americans are somewhat ascientific. Americans also rank the highest in the world on measures of individualism, which we’ve written about before. It’s a cultural dimension index. And basically, it captures the degree to which people will act according to their own personal beliefs, irrespective of the impact it may have on broader groups. And I think that’s also another way of trying to understand what’s going on right now. So when you think about all these things, maybe it’s not that much of a surprise that Americans and their political representatives and a lot of Wall Street researchers misunderstood what the rest of the developed world figured out in May, which is to shut down a pandemic.
The last topic in this week’s Eye on the Market is some follow-up Q&A from clients on the energy paper that we sent out last week. Last week, we sent out our tenth annual Eye on the Market energy paper. Each year, it’s a major effort that we do. Vaclav Smil at the University of Manitoba is our technical advisor. And every year, I get some follow-up questions from clients asking about topics that we didn’t address. This week, I addressed three of them, because we got questions about low-energy nuclear reactors, which “in theory”--and “in theory” is in quotes--convert hydrogen to helium and give off intense amounts of heat with no radiation. We talked about that. We talk about renewable natural gas, which is made from landfills and other waste. I got some questions about that. And then we also got some questions about why the world is not electrifying its container ships, which use so much fossil fuel.
So take a look. And again, we expect the global economy and the global profit cycle to continue to march on, and the big risk right now is whether the death rates continue to diverge from sharply rising infections and hospitalizations. And I would imagine that in a month or so, we will shift our focus to the fall election. So thanks for listening. Talk to you next time.
ANNOUNCER: Michael Cembalest’s Eye on the Market offers a unique perspective on the economy, current events, markets, and investment portfolios, and is a production of JPMorgan Asset and Wealth Management. Michael Cembalest is the Chairman of Market and Investment Strategy for JPMorgan Asset Management and is one of our most renowned and provocative speakers. For more information, please subscribe to the Eye on the Market by contacting your JPMorgan representative.
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