The Wuhan Coronavirus shock to the economy looks to be one of the worst on record. It remains possible that nearly all economic data series will show record weakness now. The Wuhan Coronavirus (with no vaccine/effective drugs) has left one option: shutting down economic activity to slow the spread & buy time for doctors. This strategy resulted in 6.6 million U.S. initial jobless claims last week, on top of a revised 6.9 million the week before, and 3.3 million claims the week before that. The good news here is that therapeutics and vaccines are currently in trials and look very promising in assisting in treating the virus and health professionals are confident we will have a vaccine approved by the end of this year. Because of social distancing and working therapeutic treatments, trends of new cases, hospital admissions and ICU admissions are all moving lower across most of the recent hot spots throughout the country.
In the 1800s, a typical term for a sharp economic contraction was “panic,” though “depression” was also used. The length of the downturn in the 1930s required different language, and the term “Great Depression” was used. After that, “recession” was used to indicate a cyclical downturn that wasn’t as steep as the 1930s. In the 1970s we had deep recessions with inflation, and “stagflation” was born. We were reluctant to call the 2008 experience a Depression, but it was much worse than prior experiences, and so “Great Recession” became the term.
We believe it is likely we will come up with a new phrase for what we are going through now. A typical day in an economy with a double-digit unemployment rate certainly appears Depression-like. But the Great Depression lasted for a decade (i.e., every day looked like what’s being experienced now, with the economy shut down). Given the policies (monetary, fiscal, trade, regulatory) that have been put in place in 2020, a downturn of that length is unlikely.
The stock market’s hope appears to be that this is a one-off, i.e., a lost quarter or so but not much more. Fortunately, the Fed’s quick actions have helped liquidity in many areas of the market (with an additional +$2.3 trillion last week helping high-yield, fallen-angel corporates, and some muni bonds). This is a key reason the S&P 500 has rebounded in recent weeks.
But the hit to employment is a “main street” issue. Someone’s spending is someone else’s income in the economy. It’s not a liquidity issue, it’s a solvency issue in many cases. Whether the stories about lines forming at U.S. food banks (e.g., northeast L.A.) highlight a general trend remains to be seen.
To be sure, millions could (should?) be put back on payrolls quickly. The Small Business Administration (SBA) fiscal plan is finally progressing, as guidance has been issued to financial institutions. But longer-term economic effects are harder to predict, especially with 17 million workers separated from their employer. What we do know is that U of Michigan consumer confidence plunged in early April, falling -18.1 points to 71.0 which is recession territory.
Schools remain closed, some for much (if not all) of the remainder of the academic year. PA and NYC issued decisions last week. The direction that the education sector moves in will likely inform many other service-sector activities as well (day care centers, camps, sports, choirs, nanny agencies, etc). A lack of child-care options will continue to make it tough for workers to fully return to their jobs (roughly 40% of family households have a minor child at home, according to 2019 U.S. census data).
Bottom line: “peak virus” does not equate to “peak lockdown.” That remains an economic & investment concern going forward.
The U.S. economy looked to be running at a roughly $22 trillion annualized pace in 1Q of 2020, or roughly $1.8 trillion per month seasonally-adjusted. Mid-March saw the economic hit begin in the U.S., which we will assume removed all economic growth in 1Q. Assuming roughly 25% of the U.S. economy was shut down by health fiat in April, but businesses are allowed to resume in May, 2Q GDP should fall just over -30% q/q annualized. If the shutdown persists into June, the hit becomes more than -60% annualized (!). The sequential (q/q) nature of the GDP reporting, as well as the U.S. standard of annualizing the GDP number, means the negative reading in 2Q is becoming very large as the health shutdown continues.
The other issue is that the Wuhan Coronavirus could resurface, before a drug/vaccine is in place (there’s some medical reason to fear multiple virus “waves,” based on history). Then, we’re not actually at peak-virus (ie, it’s not a one-off).
The Markets had their best week ever last week with the turnaround in sentiment we saw last week. We had mentioned to all of our clients that the reason we stay invested is because you never know when the markets will turn. History has shown us that the biggest gains in any bear market are early in the cycle and last week was no exception. In the 13 trading days since the S&P 500’s March 23rd closing low at 2237, the +25% rally ranks as the best 13-day advance of all time. The comparable observations were all seen at (or very near) major market lows – March 2009, December 2008, October 1974, August 1982, and August 2002. The aftermath of a momentum surge is a lesson in patience – the forward returns over the next +1 to +3 months tend to be very random and, in many cases, mean reverting, while performance +6 and +12 months out is historically exceptional. With the S&P now nearing the 2800-2900 resistance zone where some misplaced longs likely reside, the above observations (short-term vs. long-term) may again prove relevant.
99% of issues are above their 20-day moving average – tactically overbought to be sure, but also reflective of an internal momentum surge to compliment the market’s external rally. While we are sympathetic to the idea that the dominance of passive investing has distorted some of this data, we’re equally intrigued that there are zero examples in the 2000 to 2002 and 2007 to 2009 bear markets with more than 95% of stocks above their respective 20-day averages. Again, the dilemma of a momentum surge – short-term overbought, but with positive longer-term implications.
Please feel free to call or email us with any questions or concerns you may have.
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments
Sincerely,
Fortem Financial
(760) 206-8500
team@fortemfin.com
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