COVID-19 - Perception Versus Reality

Posted on August 5, 2020

Dave-Breazzano-w-title2The market’s perception of the current state of the pandemic can change quickly and result in heightened volatility. For example, the perception that certain states may have opened too soon or that a second wave of the virus is imminent, and thus economic pullbacks are on the horizon, can increase market volatility significantly. Such changes in perception are often driven by the latest headlines, which can be misleading and therefore do not represent reality.

As prudent investors, we need to filter out the day-to-day noise and focus on the factors that will determine whether the economic reopening can continue or broad pullbacks will be needed in certain areas. In this regard, I believe that the most important factor to monitor in a specific region is hospital capacity utilization resulting from COVID-19 patients, in particular ICU bed capacity. Fatalities are of course the most important metric that we as a society must strive to minimize; however, fatalities typically rise after an increase in ICU beds and ventilator usage, and will thus lag changes in hospital capacity.

An increase in the number of infections identified daily does not necessarily mean that the situation is deteriorating. If the number of COVID-19 tests being done is increasing, one would expect an increase in the number of diagnosed infections, particularly given the large number of asymptomatic cases. For example, the U.S. is currently conducting almost 650,000 tests per day compared to just under 160,000 tests conducted per day on April 10th. Accordingly, any comparison of the total number of new infections each day now to the number two or three months ago is not an apples-to-apples assessment.

Some believe that an increase in the ratio of positive-cases-to-tests, or positive test rate, in a specific area is the most important indicator that the situation is worsening, and action needs to be taken to mitigate the spread. I think that is an important metric to watch, but still does not provide the full picture. If the positive test rate is increasing, but a large portion of that increase is associated with asymptomatic cases or young, healthy individuals being infected, this result should not cause the same kind of alarm as if the increase in positive tests was skewed toward the elderly. Increasing stress placed on the healthcare system from COVID-19 patients, such as higher utilization of ICU capacity, is what will most likely cause a pullback in the level of economic activity, and so that is where I focus the most of my attention as it relates to determining any corresponding impact on the leveraged credit markets.

In addition, I believe that our healthcare professionals learned valuable lessons during the first wave and over the time period since, and as a result, the system as a whole is much better prepared to handle an increase in COVID-19 patients. Significant progress has been made on treatment protocols at different stages of the virus, which I believe will result in a lower mortality rate going forward. Furthermore, decision makers at all levels of government have a better understanding of the virus and we are beginning to see best practices, such as wearing masks in public, be applied more consistently across the country. Moreover, recently we have seen targeted closures of bars together with more restrictions placed on restaurants in response to a spike in cases in certain regions. Time will tell, but I believe that responses such as these can be effective in controlling outbreaks while at the same time avoiding the economic pain associated with reverting to a full-scale shutdown. Finally, while I cannot predict when a vaccine will be made available, I do know that every day that passes brings us one day closer to such an outcome.

With that stated, at present, the country is currently in the midst of an alarming increase in the number of new COVID-19 infections being identified daily, primarily in southern and western states, many of which were amongst the first to reopen their economies in May. If such increase in daily infections continues unabated and quickly progresses to a situation where there are a large number of very sick patients, threatening to overwhelm ICU capacity across multiple states, my relatively favorable outlook for the economic recovery may need to be adjusted accordingly.

This has been an excerpt from DDJ’s 1st Half 2020 Leveraged Credit Review and Outlook. If you are interested in reading more, click image below.


David Breazzano, DDJ’s President, CIO and Portfolio Manager, offers some perspective on the COVID-19 crisis.


DDJ Capital Management is a privately held investment manager for institutional clients that specializes in investments within the leveraged credit markets. Since our inception in 1996, DDJ has sought to generate attractive risk-adjusted returns for our clients by adhering to a value-oriented, bottom-up, fundamental investment philosophy.  DDJ has extensive experience investing in securities issued by non-investment grade companies within the lower tier of the credit markets, including high yield bonds, bank loans and other special situation investments.

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