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COVID-19: Stress Testing

COVID-19: Stress Testing



While the full impact of COVID-19 on the global economy is still unknowable, we are gaining perspective on its economic impact, and thus its investment implications. Captured below are perspectives from each of our investment teams.

We are stress-testing companies using a common set of reference points. – Global Equity Team

Global Equity

Projected U.S. gross domestic product (GDP) ranges widely in the second quarter, but has the potential to be the largest downdraft since data has been recorded.

In this environment, our portfolios have been assisted by our high-quality bias, which is quantified using our systematic tools. We believe this captures the quality components of a company.

We have not made significant positioning changes in response to recent market events, staying the course in our Leaders portfolios and making slightly more changes in our emerging markets portfolios, where we have been more nimble.

We remain steadfastly focused on seeking opportunities to add to our best ideas, looking beyond transitory virus-related business effects.

In particular, we are interested in quality growth companies that have been out of our reach purely from a valuation perspective, as well as high-quality cyclicals that have witnessed significant declines but have the wherewithal to navigate the current crisis.

We are also stress-testing companies using a common set of reference points. As quality growth investors, we believe our portfolios are positioned well, but it is still critical to test all of the companies in our high-quality universe, particularly those at the epicenter of the crisis, to determine which will make it through, which will need to raise equity, and which may fail to make it through the crisis.

We are spending considerable time estimating how deep the drawdown will be, as well as analyzing what the economic recovery may look like across the globe, making updates as new information becomes available.

Our investment philosophy leads us to companies with durable businesses that we believe can outperform over a market cycle. – U.S. Growth Equity Team

U.S. Growth Equity

While the broader market has been selling stocks somewhat indiscriminately, our approach is to examine the idiosyncratic risks that each company faces and make portfolio decisions based on that bottom-up analysis.

Amid the coronavirus outbreak, on a stock-by-stock basis we are focused on determining how much demand has been permanently lost versus temporarily delayed, as well as how much of the disruption has already been priced into the stock. We are examining the business risk, leverage risk, and valuation risk, for both owned and unowned stocks. We are using this framework to analyze individual stock opportunities should this be either a temporary slowdown or a more prolonged recession.

Our investment philosophy leads us to companies with durable businesses, whose stock prices are not reflective of our long-term fundamental expectations, that we believe can outperform over a market cycle.

In light of valuation shifts between some of our holdings, we reduced our position in a company with exposure to grocery channels that has significantly outperformed amid the “pantry loading” phenomenon. Meanwhile, we increased our exposure to a consumer staples company whose valuation has fallen in recent weeks given it sells into fast food/quick service restaurants—end markets that typically hold up relatively well in a recession, but are clearly under pressure in the current environment. In both cases, we believed the relative valuations reflected an extrapolation of recent trends as being more structural in nature.

Ongoing market volatility should continue to present attractive entry points for our fundamental, bottom-up approach. We continue to monitor market movements and will make adjustments as appropriate.

We remain focused on companies with strong balance sheets that can withstand a challenging market environment for an extended period. – U.S. Value Equity Team

U.S. Value Equity

Our focus remains on quality. In particular, our team is increasingly focused on balance-sheet strength and avoiding significant leverage, as leverage can cause major challenges in extreme market conditions.

Still, this is a challenging market environment—and a highly unusual market environment where broad market declines are not just the result of an impending economic slowdown. Correlations have spiked, and we have seen indiscriminate selling of securities regardless of underlying company fundamentals. Even companies with durable cash flow models that typically hold up well during a recession are being penalized as investors focus on COVID-19.

Overall, we remain focused on companies with strong balance sheets that can withstand a challenging market environment for an extended period.

We have significantly reduced our exposure to energy stocks. We continue to hold a few select positions—for example, a compression company that is well-positioned despite oil price declines—but we are underweight the energy sector.

Within financials, we have reduced our exposure to banks, which we believe will be significantly affected by the coming downturn.

We feel confident that once the broad fear-based market environment subsides and investors focus on company fundamentals, the higher-quality companies with strong balance sheets will emerge from this crisis in an advantageous position.

With respect to the economy we do not anticipate a near-term V-shaped recovery, but rather a modified U-shape with a longer tail recovery. – Dynamic Allocation Strategies Team

Dynamic Allocation Strategies

We are cautious and in a “navigation mode.”

Earlier this year, we reduced our equity exposure, and have maintained a low equity allocation—exceedingly low if you consider the current valuation opportunities. At this point, the strategies’ only significant long equity exposures are in the United States and the United Kingdom.

We also de-risked the currency exposures across our portfolios in a series of strategy changes beginning in late January. Since then, we have reduced exposure to currencies that we perceived would be negatively impacted by the subsequent sharp economic contraction driven by responses to the virus, as well as currencies negatively affected by the oil price war. At the same time, we have increased exposure to safe-haven currencies.

The two questions that we are analyzing most closely now are: 1) what is the actual economic impact of the virus, as well as the impact of the policy responses, and 2) how much of that impact has already been priced into the market?

As we think about potential developments that could begin to bring some clarity to investors’ perception of the pandemic’s endgame, two events could serve as signposts and opportunities to again increase risk: 1) oncoming stress on global healthcare systems, and 2) continued downward revisions of GDP estimates and increased references to the word “depression.”

With respect to the economy we do not anticipate a near-term V-shaped recovery, but rather a modified U-shape with a longer tail recovery.

For those seeking encouragement about the long-term prospects for the U.S. economy, history provides valuable lessons. If the United States can withstand World War I and the Spanish Flu at the same time, we are confident that the United States can withstand what is happening today. 

Fixed Income

Concerns about the economic impact of the COVID-19 pandemic have hit all sectors of the fixed-income market, leading to drastically wider spreads in investment-grade and high-yield credit markets, and extreme volatility in the U.S. Treasury market.

While fixed-income markets today reflect extreme uncertainty, we believe that significant actions taken by the U.S. Federal Reserve (Fed) and other central banks around the world will provide some stability going forward.

The situation is extremely fluid, with major announcements about monetary and fiscal stimulus efforts coming seemingly every hour. But the Fed has rapidly deployed its tools to provide liquidity and stabilize the markets, and the Fed and the Treasury have both stated that they will do “whatever it takes.” Investors need to give the Fed’s actions a chance to work.

Fixed-income investors are focused on the rate of the spread of COVID-19, and we believe any news of a decline in the spread of the virus in the United States will be viewed positively.

Emerging Markets Debt

The external backdrop is challenging for emerging markets debt (EMD), in particular as a result of the poor growth outlook in the near future as well as the path of the recovery. The oil price war will further weigh on risk assets.

While we believe that the risk of sovereign credit events may rise, in particular as a result of the deterioration of fundamental and funding conditions, we believe that over time this will be mitigated by strong support from international finance institutions (such as the World Bank and International Monetary Fund) as well as easing global liquidity conditions.

Partly as a result of having a lender of last resort, emerging markets hard currency bonds tend to have much lower ex-post default rates and much higher recovery rates than credit spreads imply. A significant proportion of the universe is trading in highly distressed territory, which we believe is likely to overstate the probability of default and loss given default.

This offers great opportunity for alpha generation for active managers such as ourselves. While volatile conditions may give rise to better entry moments, from a valuation perspective current levels offer substantial potential returns over the longer-term horizon. Corporates went into this environment close to their strongest fundamental position in years and with relatively clear maturities in the next 12 months.

We are watching the duration of this shock’s effect on issuers’ liquidity, but barring a protracted rebound valuations seem oversold, making potential returns going forward attractive.

Investing involves risks, including the possible loss of principal. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations and economic and political risks, which may be enhanced in emerging markets. Different investment styles tend to shift in and out of favor depending on market conditions and investor sentiment. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit, and inflation risk. Sovereign debt securities are subject to the risk that an entity may delay or refuse to pay interest or principal due to cash flow problems, insufficient foreign reserves, or political or other considerations. High-yield, lower-rated securities involve greater risk than higher-rated securities. Currency transactions are affected by fluctuations in exchange rates; currency exchange rates may fluctuate significantly over short periods of time. Individual securities may not perform as expected or a strategy used by the Adviser may fail to produce its intended result. Diversification does not ensure against loss. Past performance is not indicative of future results.

References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced do not represent all of the securities purchased, sold, or recommended for advisory clients. It should not be assumed that any investment in the securities referenced was or will be profitable.

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Coronavirus dashboard for October 5: an autumn lull as COVID-19 evolves towards seasonal endemicity

  – by New Deal democratBack in August I highlighted some epidemiological work by Trevor Bedford about what endemic COVID is likely to look like, based…




 - by New Deal democrat

Back in August I highlighted some epidemiological work by Trevor Bedford about what endemic COVID is likely to look like, based on the rate of mutations and the period of time that previous infection makes a recovered person resistant to re-infection. Here’s his graph:

He indicated that it “illustrate[s] a scenario where we end up in a regime of year-round variant-driven circulation with more circulation in the winter than summer, but not flu-like winter seasons and summer troughs.”

In other words, we could expect higher caseloads during regular seasonal waves, but unlike influenza, the virus would never entirely recede into the background during the “off” seasons.

That is what we are seeing so far this autumn.

Confirmed cases have continued to decline, presently just under 45,000/day, a little under 1/3rd of their recent summer peak in mid-June. Deaths have been hovering between 400 and 450/day, about in the middle of their 350-550 range since the beginning of this past spring:

The longer-term graph of each since the beginning of the pandemic shows that, at their present level cases are at their lowest point since summer 2020, with the exception of a brief period during September 2020, the May-July lull in 2021, and the springtime lull this year. Deaths since spring remain lower than at any point except the May-July lull of 2021:

Because so many cases are asymptomatic, or people confirm their cases via home testing but do not get confirmation by “official” tests, we know that the confirmed cases indicated above are lower than the “real” number. For that, here is the long-term look from Biobot, which measures COVID concentrations in wastewater:

The likelihood is that there are about 200,000 “actual” new cases each day at present. But even so, this level is below any time since Delta first hit in summer 2021, with the exception of last autumn and this spring’s lulls.

Hospitalizations show a similar pattern. They are currently down 50% since their summer peak, at about 25,000/day:

This is also below any point in the pandemic except for briefly during September 2020, the May-July 2021 low, and this past spring’s lull.

The CDC’s most recent update of variants shows that BA.5 is still dominant, causing about 81% of cases, while more recent offshoots of BA.2, BA.4, and BA.5 are causing the rest. BA’s share is down from 89% in late August:

But this does not mean that the other variants are surging, because cases have declined from roughly 90,000 to 45,000 during that time. Here’s how the math works out:

89% of 90k=80k (remaining variants cause 10k cases)
81% of 45k=36k (remaining variants cause 9k cases)

The batch of new variants have been dubbed the “Pentagon” by epidmiologist JP Weiland, and have caused a sharp increase in cases in several countries in Europe and elsewhere. Here’s what she thinks that means for the US:

But even she is not sure that any wave generated by the new variants will exceed summer’s BA.5 peak, let alone approach last winter’s horrible wave:

In summary, we have having an autumn lull as predicted by the seasonal model. There will probably be a winter wave, but the size of that wave is completely unknown, primarily due to the fact that probably 90%+ of the population has been vaccinated and/or previously infected, giving rise to at least some level of resistance - a disease on its way to seasonal endemicity.

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Gonorrhea became more drug resistant while attention was on COVID-19 – a molecular biologist explains the sexually transmitted superbug

The US currently has only one antibiotic available to treat gonorrhea – and it’s becoming less effective.




The _Neisseria gonorrhoeae_ bacterium causes gonorrhea by infecting mucous membranes. Design Cells/iStock Getty Images Plus via Getty Images

COVID-19 has rightfully dominated infectious disease news since 2020. However, that doesn’t mean other infectious diseases took a break. In fact, U.S. rates of infection by gonorrhea have risen during the pandemic.

Unlike COVID-19, which is a new virus, gonorrhea is an ancient disease. The first known reports of gonorrhea date from China in 2600 BC, and the disease has plagued humans ever since. Gonorrhea has long been one of the most commonly reported bacterial infections in the U.S.. It is caused by the bacterium Neisseria gonorrhoeae, which can infect mucous membranes in the genitals, rectum, throat and eyes.

Gonorrhea is typically transmitted by sexual contact. It is sometimes referred to as “the clap.”

Prior to the pandemic, there were around 1.6 million new gonorrhea infections each year. Over 50% of those cases involved strains of gonorrhea that had become unresponsive to treatment with at least one antibiotic.

In 2020, gonorrhea infections initially went down 30%, most likely due to pandemic lockdowns and social distancing. However, by the end of 2020 – the last year for which data from the Centers for Disease Control and Prevention is available – reported infections were up 10% from 2019.

It is unclear why infections went up even though some social distancing measures were still in place. But the CDC notes that reduced access to health care may have led to longer infections and more opportunity to spread the disease, and sexual activity may have increased when initial shelter-in-place orders were lifted.

As a molecular biologist, I have been studying bacteria and working to develop new antibiotics to treat drug-resistant infections for 20 years. Over that time, I’ve seen the problem of antibiotic resistance take on new urgency.

Gonorrhea, in particular, is a major public health concern, but there are concrete steps that people can take to prevent it from getting worse, and new antibiotics and vaccines may improve care in the future.

How to recognize gonorrhea

Around half of gonorrhea infections are asymptomatic and can only be detected through screening. Infected people without symptoms can unknowingly spread gonorrhea to others.

Typical early signs of symptomatic gonorrhea include a painful or burning sensation when peeing, vaginal or penal discharge, or anal itching, bleeding or discharge. Left untreated, gonorrhea can cause blindness and infertility. Antibiotic treatment can cure most cases of gonorrhea as long as the infection is susceptible to at least one antibiotic.

There is currently only one recommended treatment for gonorrhea in the U.S. – an antibiotic called ceftriaxone – because the bacteria have become resistant to other antibiotics that were formerly effective against it. Seven different families of antibiotics have been used to treat gonorrhea in the past, but many strains are now resistant to one or more of these drugs.

The CDC tracks the emergence and spread of drug-resistant gonorrhea strains.

Why gonorrhea is on the rise

A few factors have contributed to the increase in infections during the COVID-19 pandemic.

Early in the pandemic, most U.S. labs capable of testing for gonorrhea switched to testing for COVID-19. These labs have also been contending with the same shortages of staff and supplies that affect medical facilities across the country.

Many people have avoided clinics and hospitals during the pandemic, which has decreased opportunities to identify and treat gonorrhea infections before they spread. In fact, because of decreased screening over the past two and a half years, health care experts don’t know exactly how much antibiotic-resistant gonorrhea has spread.

Also, early in the pandemic, many doctors prescribed antibiotics to COVID-19 patients even though antibiotics do not work on viruses like SARS-CoV-2, the virus that causes COVID-19. Improper use of antibiotics can contribute to greater drug resistance, so it is reasonable to suspect that this has happened with gonorrhea.

Overuse of antibiotics

Even prior to the pandemic, resistance to antibiotic treatment for bacterial infections was a growing problem. In the U.S., antibiotic-resistant gonorrhea infections increased by over 70% from 2017-2019.

Neisseria gonorrhoeae is a specialist at picking up new genes from other pathogens and from “commensal,” or helpful, bacteria. These helpful bacteria can also become antibiotic-resistant, providing more opportunities for the gonorrhea bacterium to acquire resistant genes.

Strains resistant to ceftriaxone have been observed in other countries, including Japan, Thailand, Australia and the U.K., raising the possibility that some gonorrhea infections may soon be completely untreatable.

Steps toward prevention

Currently, changes in behavior are among the best ways to limit overall gonorrhea infections – particularly safer sexual behavior and condom use.

However, additional efforts are needed to delay or prevent an era of untreatable gonorrhea.

Scientists can create new antibiotics that are effective against resistant strains; however, decreased investment in this research and development over the past 30 years has slowed the introduction of new antibiotics to a trickle. No new drugs to treat gonorrhea have been introduced since 2019, although two are in the final stage of clinical trials.

Vaccination against gonorrhea isn’t possible presently, but it could be in the future. Vaccines effective against the meningitis bacterium, a close relative of gonorrhea, can sometimes also provide protection against gonorrhea. This suggests that a gonorrhea vaccine should be achievable.

The World Health Organization has begun an initiative to reduce gonorrhea worldwide by 90% before 2030. This initiative aims to promote safe sexual practices, increase access to high-quality health care for sexually transmitted diseases and expand testing so that asymptomatic infections can be treated before they spread. The initiative is also advocating for increased research into vaccines and new antibiotics to treat gonorrhea.

Setbacks in fighting drug-resistant gonorrhea during the COVID-19 pandemic make these actions even more urgent.

Kenneth Keiler receives funding from NIH.

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Spread & Containment

Measuring the Ampleness of Reserves

Over the past fifteen years, reserves in the banking system have grown from tens of billions of dollars to several trillion dollars. This extraordinary…



Over the past fifteen years, reserves in the banking system have grown from tens of billions of dollars to several trillion dollars. This extraordinary rise poses a natural question: Are the rates paid in the market for reserves still sensitive to changes in the quantity of reserves when aggregate reserve holdings are so large? In today’s post, we answer this question by estimating the slope of the reserve demand curve from 2010 to 2022, when reserves ranged from $1 trillion to $4 trillion.

What Are Reserves? And Why Do They Matter?

Banks hold accounts at the Federal Reserve where they keep cash balances called “reserves.” Reserves meet banks’ various needs, including making payments to other financial institutions and meeting regulatory requirements. Over the past fifteen years, reserves have grown enormously, from tens of billions of dollars in 2007 to $3 trillion today. The chart below shows the evolution of reserves in the U.S. banking system as a share of banks’ total assets from January 2010 through September 2022. The supply of reserves depends importantly on the actions of the Federal Reserve, which can increase or decrease the quantity of reserves by changing its securities holdings, as it did in response to the global financial crisis and the COVID-19 crisis.

Reserves Have Ranged from 8 to 19 Percent of Bank Assets from 2010 to 2022

Sources: Federal Reserve Bank of New York; Federal Reserve Economic Data, FRED (“TLAACBW027SBOG”); authors’ calculations.

Why does the quantity of reserves matter? Because the “price” at which banks trade their reserve balances, which in turn depends importantly on the total amount of reserves in the system, is the federal funds rate, which is the interest rate targeted by the Federal Open Market Committee (FOMC) in the implementation of monetary policy. In 2022, the FOMC stated that “over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime.” In this ample reserves regime, the Federal Reserve controls short-term interest rates mainly through the setting of administered rates, rather than by adjusting the supply of reserves each day as it did prior to 2008 (as discussed in this post). In today’s post, we describe a method to measure the sensitivity of interest rates to changes in the quantity of reserves that can serve as a useful indicator of whether the level of reserves is ample.

The Demand for Reserves Informs Us about Rate Sensitivity to Reserve Shocks

To assess whether the level of reserves is ample, one needs to first understand the demand for reserves. Banks borrow and lend in the market for reserves, typically overnight. The reserve demand curve describes the price at which these institutions are willing to trade their balances as a function of aggregate reserves. Its slope measures the price sensitivity to changes in the level of reserves. Importantly, banks earn interest on their reserve balances (IORB), set by the Federal Reserve. Because the IORB rate directly affects the willingness of banks to lend reserves, it is useful to describe the reserve demand curve in terms of the spread between the federal funds rate and the IORB rate. In addition, we control for the overall growth of the U.S. banking sector by specifying reserve demand in terms of the level of reserves relative to commercial banks’ assets.

There is a clear nonlinear downward-sloping relationship between prices and quantities of reserves, consistent with economic theory. The chart below plots the spread between the federal funds rate and the IORB against total reserves as a share of commercial banks’ total assets.  When reserves are very low, the demand curve has a steep negative slope, reflecting the willingness of borrowers to pay high rates because reserves are scarce. At the other extreme, when reserves are very high, the curve becomes flat because banks are awash with reserves and the supply is abundant. Between these two regions, an intermediate regime–that we refer to as “ample”–emerges, where the demand curve exhibits a modest downward slope. The color coding of the chart reflects the shifts in the reserve demand curve over time. In particular, the curve appears to have moved to the right and upward around 2015 and then moved upward after March 2020, at the onset of the COVID pandemic.

Reserve Demand Has Shifted over Time

Sources: Federal Reserve Bank of New York; Federal Reserve Economic Data, FRED (“TLAACBW027SBOG,” “IOER,” and “IORB”); authors’ calculations.

This chart highlights two of the main challenges in estimating the slope of the reserve demand curve. First, the curve is highly nonlinear, which means that a standard linear estimation approach is not appropriate. Second, various long-lasting changes in the regulation and supervision of banks, in their internal risk-management frameworks, and in the structure of the reserve market itself have resulted in shifts in the reserve demand curve. A third challenge is that the quantity of reserves may be endogenous to banks’ demand for them. Therefore, to properly measure the reserve demand curve, one must disentangle shocks to supply from those to demand. As we explain in detail in a recent paper, our estimation strategy addresses all three of these challenges.

Estimating the Slope of the Reserve Demand Curve

Our approach provides time-varying estimates of the price sensitivity of the demand for reserves that can be used to distinguish between periods in which reserves are relatively scarce, ample, or abundant. The chart below presents our daily estimates of the slope of the demand curve, as measured by the rate sensitivity to changes in reserves. Although we do not have a precise criterion for when reserves are scarce versus ample, during two episodes in our sample, the estimated rate sensitivity is well away from zero. The first episode occurs early in our sample, in 2010, and the second emerges almost ten years later, in mid-2019. In two other periods—during 2013-2017 and from mid-2020 through early September 2022—the estimated slope is very close to zero, indicating an abundance of reserves. The remaining periods are characterized by a modest negative slope of the reserve demand curve, consistent with ample (but short of abundant) reserves. The overall pattern of these estimates is robust to changes in the model specification, such as including spillovers from the repo and Treasury markets or measuring reserves as a share of gross domestic product or bank deposits (instead of as a share of banks’ assets).

Rate Sensitivity Changed over Time, Following the Path of Reserves

Sources: Federal Reserve Bank of New York; Federal Reserve Economic Data, FRED (“TLAACBW027SBOG,” “IOER,” and “IORB”); authors’ calculations.

Interest Rate Spreads Alone Are Not Reliable Indicators of Reserve Scarcity

As we discuss in our paper, the time variation in the estimated price sensitivity in the demand for reserves is based on observations of small movements along the demand curve due to exogenous supply shocks. The location of the curve itself, however, also changes over time. That is, there is not a constant relationship between the level of reserves and the slope of the reserve demand curve.  

In our paper, we find evidence of both horizontal and vertical shifts in the reserve demand curve, with vertical upward shifts being particularly important since 2015. This finding implies that the level of the federal funds-IORB spread may not be a reliable summary statistic for the sensitivity of interest rates to reserve shocks, and that estimates of the price sensitivity in the demand for reserves provide additional useful information.

In summary, we have developed a method to estimate the time-varying interest rate sensitivity of the demand for reserves that accounts for the nonlinear nature of reserve demand and allows for structural shifts over time. A key advantage of our methodology is that it provides a flexible and readily implementable approach that can be used to monitor the market for reserves in real time, allowing one to assess the “ampleness” of the reserve supply as market conditions evolve.

Gara Afonso is the head of Banking Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.

Gabriele La Spada is a financial research economist in Money and Payments Studies in the Federal Reserve Bank of New York’s Research and Statistics Group.   

John C. Williams is the president and chief executive officer of the Federal Reserve Bank of New York.  

How to cite this post:
Gara Afonso, Gabriele La Spada, and John C. Williams, “Measuring the Ampleness of Reserves,” Federal Reserve Bank of New York Liberty Street Economics, October 5, 2022,

The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).

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