Market Report – Spring 2020
Nowhere in any of the 2020 economic outlook reports was there any mention of a global pandemic, yet here we are. While journalists from sensible corners of the news media world have for years issued warnings about the health and economic risks of pandemics, the prospects for such an event seemed distant and abstract to most. The machinery of the global economy chugged on.
The novel corona virus outbreak began with a single known case on December 10 in Wuhan, China. By the month’s end, the new virus was identified by Chinese health officials. In mid-January, cases were being reported in other countries, and the virus began to spread rapidly. Throughout March, new infections and upsetting mortality reports issued by countries around the globe worsened as the days passed.
Across the United States, lockdowns, quarantines, sheltering-in-place, mandatory business closures, moratoriums on public gatherings, and other social distancing rules have become the norm as part of the effort to stem the outbreak. As customers disappear, businesses close, and travel is curtailed, the economic damage is piling up. Service and manufacturing companies have already begun laying off employees.
Today’s corona virus pandemic is a different kind of situation than the 2008 Financial Crisis. Then, the economic slowdown occurring was largely due to financial excesses and troubled mortgage loans, whereas today the slowing of the economy is a result of behavioral changes being made across the country to stem the viral outbreak–– the avoidance of travel, shopping, and gatherings. Infectious disease experts say that these social distancing requirements are an effective tool to stem the spread of the virus. Ignoring or discontinuing these rules will lead to a prolonged, deeper, and more damaging crisis, they say.
At the end of March, the federal government passed a mammoth $2 trillion stimulus bill that will provide direct payments to many people, dramatically expand unemployment insurance, offer hundreds of billions in business loans, refill state coffers, and extend additional resources to healthcare providers. Additionally, the Fed took action by cutting interest rates in March–its go-to strategy in fighting economic slowdowns–with the acknowledgment that the available tools are better suited to addressing stresses to the financial system than consumer behavior-related stresses.
While the lower interest rates–which encourage borrowing and business investment–may not help that much right now, they will help once the outbreak passes and consumers and businesses are confident enough to return to spending and business investment. As in past stock market recoveries, the early portion of recovery may be the steepest.
The stock market is known as a “leading indicator” of the economy, meaning it has a fairly good record of anticipating the direction of the economy. The stock market peaked on February 19, about the time that the likely economic impacts of the virus were becoming better understood, after which stocks began a steep descent. For the first quarter, large-company stocks in the US declined by 19.6%. Smaller-company stocks were harder hit–down by 30.6% as traders perceived them as less able to withstand severe financial stresses. Foreign stocks lost 22.8%, and US bonds–broadly measured–were up 3.1%. Bonds are generally a more stable investment class than stocks.
In this case, the stock market is likely accurate in its anticipation of an abrupt economic slowdown. At publication, 10 million people have already filed for unemployment in the US–and unemployment rates are expected to reach 15 – 20% under continuing social distancing mandates. In the final two weeks of March, new unemployment claims had by far exceeded the number of people who collected benefits during the 2007 – 2009 recession. This surge is a stunning reflection of the damage the corona virus is inflicting on the US economy. An economic recession technically defined as two quarters of economic contraction is virtually assured in the US and around the world, although the ultimate severity and duration remain uncertain.
Beyond that, the economic outlook depends mainly on how quickly the U.S.and the rest of the worldcan arrest the spread of the virus. Top U.S. health officials have stated that this could take anywhere from several weeks to several months. In late March, Fed Chairma Jerome Powell said, “This is a unique situation. It’s not like a typical downturn. We’ve asked people to step back from economic activity really to make an investment in our public health.”
Evaluating the impact of the pandemic on businesses, and on the stock and bond markets, involves recognizing the extent of impact on current and future business earnings. As customers have dried up for many businesses, precipitous earnings declines are following suit. Whether we’re looking at Main Street or Wall Street businesses, the effects are similar (though larger companies may have more resources to cushion the blow). The effectiveness of the myriad of government assistance initiatives will determine how businesses weather the earnings swoon.
The workers for these very same businesses may be already unemployed–or are at risk of it as business earnings evaporate. The widespread economic distress caused by the outbreak has exposed the enormous risk we have courted as a society in allowing extreme concentration of wealth disparity in the U.S. In September 2019 the Census Bureau reported that income inequality in the U.S. had reached its highest level in 50 years, by its measurement. With loss of employment, much of the US population is now at extraordinary risk for personal financial collapse and all the anguish that accompanies that. Moreover, the many newly needy people will have to depend on public assistance to meet their basic survival needs, creating further strain on state and municipal budgets. The need to quickly and effectively address income inequality should be one of the top priorities driving policy change going forward.
However, it’s springtime and looking out at the trees across the street or the flowers beginning to bud in your yard, things can seem quite normal, and lovely actually. It can be hard to believe that humanity’s great vulnerability has indeed been exploited by a microscopic virus leaving vast disruption and even death in its wake. Stunned and fearful are perfectly reasonable feelings to be experiencing right now. Nobody knows exactly when the day will arrive when going out in public is no longer considered a health risk, or until normal commercial activity resumes in full. Though, that day is coming. It may not be right around the corner, but it is on the way. Unwavering patience in the presence of such undesirable circumstances is a monumental task. Though, this is our best path forward.
The overriding factor in how this plays out will be how quickly the spread of the virus can be contained. The speed of the wider economic recovery is impossible to determine at this time, as is the duration of the pandemic. Staying the course when conditions are dire can test us as investors, even though market history shows us this may be the best option. Once the infection curve flattens, the stock market may take it as a cue to begin its bumpy road back.