Before the pandemic forced the shutdown of most of New York City, I had the opportunity to see Talking Heads founder and former lead singer David Byrne’s American Utopia on Broadway. It was an amazing performance, and a reminder of what life was like before the pandemic.
For the past few months, there have been many days when it seems like we’re on the proverbial Road to Nowhere - my favorite song from the show; with many of us working from home (we’re the fortunate ones) and sheltering in place. We’re constantly bombarded by news regarding the pandemic, the economy and the markets. It’s a lot of information to process and it’s not always clear what road we’re on or where it’s taking us.
The bad news won’t stop, but the markets keep risking. I’m often asked to explain how the economy could have lost 30 million jobs in the past six weeks while the S&P 500 Index has soared more than 31 percent from its March lows. I’d like to offer up a couple of ideas to help make sense of it all.
Imagine you are driving in your car. If you are too preoccupied with looking in your rearview mirror, you will only see where you’ve already traveled. You will be like an economist looking backward, reporting on what’s already happened. However, if you keep your eyes on the road ahead, you are more likely to reach your destination - based on your ability to read road signs and maps (a lost art given GPS navigation). You will be like an investor looking forward, focused on what you think has a reasonable probability of happening in the future.
There’s a big difference between information, which consists of bits of data, and insights, which result from analysis of data to make the information more useful.
Let’s begin with information. If you turn on CNN, you will immediately see on the right side of the screen a tally of the confirmed COVID-19 cases and the number of reported deaths. This past week, two grim milestones were reported: the number of cases in the U.S. surpassed one million, while the death total climbed above 60,000.
Recall that social distancing commenced in March in order to flatten the curve, to slow the spread of the virus and keep our hospital systems from getting overwhelmed. The information carried on CNN (and other news outlets), tragic as it is, does not tell us anything except what’s already occurred. It is simply point-in-time data. It doesn’t tell us anything about the prevalence of COVID-19, the virus’s infectiousness, and hospitalization and fatality rates. It doesn’t tell you anything about the trends; is it getting worse, leveling off, or improving? In other words, the data without analysis doesn’t provide much in the way of insights.
For example, we know that the pandemic is playing out differently in different parts of the country. We also know that the virus is impacting different groups of people, such as the elderly or those with pre-existing conditions, differently. As this data is analyzed, it generates insights that can help inform decisions about when, how and how quickly the economy can be re-opened.
There have been some encouraging signs that the pandemic curve may have crested and that our hospital systems are no longer at risk of being completely overwhelmed. The hospital ship USNS Comfort is scheduled to sail from New York City, the epicenter of the crisis in the U.S.
As a result of these positive developments and a better understanding of the data, the economy is gradually being reopened, with government guidelines being issued on when, how and how quickly to do this – that are data driven.
Unfortunately, it will take time before we see these positive developments in the economic data; but as previously mentioned, that’s because economic data is backward looking and is reported with a lag.
As an example, it was reported this week that the U.S. economy shrank 4.8% on an annualized basis during the first quarter of 2020. In the past five weeks, over 26 million Americans have filed for unemployment, that’s 1 in 6 workers, a staggering amount. Economic data is expected to worsen in the coming months, with economists forecasting a contraction in GDP from 30%to 40% in the second quarter and the unemployment rate increasing to as much as 20%.
If these projections materialize, the U.S. economy will have experienced its worst contraction since the Great Depression. But while the numbers are truly horrific, especially for the individuals directly impacted, they only tell part of the story.
For example, the reports don’t mention that the trend in new jobless claims is beginning to level off. The reports don’t mention that many of the newly unemployed are finally starting to receive stimulus and enhanced unemployment benefits that should help them weather the storm until the economy fully reopens. The data also doesn’t reflect the unprecedented fiscal and monetary policy responses intended to help businesses survive and markets function.
Financial markets have rallied in response to the trillions of dollars of stimulus money from the Fed and Congress that imply that policymakers will do whatever it takes to stabilize the economy until it can be restarted. The periodic glimmer of positive news fuels investors’ optimism that things can only get better.
In the past week, Congress passed another$500 billion spending bill, bringing the total amount of fiscal stimulus up to $2.9 trillion. To put that in perspective, that represents more than a 60% increase over the annual federal budget. A staggering amount of money to be sure. All of this was passed in a matter of weeks on a bipartisan basis.
Not to be outdone, the Federal Reserve, which had already gone all-in on its monetary stimulus, said it’s committed to “using its full range of tools” and to keep the Fed Funds rate at zero “until it is confident that the economy has weathered recent events.”
The Fed has injected trillions of dollars of liquidity into the markets, resorting to measures never taken before by the U.S. central bank, including taking steps to directly intervene in the credit markets. This has had a profound impact, allowing companies most impacted by the pandemic to access markets. In the past few weeks, Ford, Marriott, Hilton, Hyatt and Delta have all issued bonds to bolster their liquidity and capital positions. They may have paid up to do so, with yields ranging from 5.5% to 10%. But they bought themselves time to get past the virus and get up and running again as the economy reopens.
As I noted in my last correspondence, there is an old saying on Wall Street, “Don’t Fight the Fed.” Clearly, the unprecedented amount of fiscal and monetary stimulus are having a powerful effect on the markets. Again, markets are forward looking, and they seem to be expressing confidence that this dual policy response will be enough to stabilize and then restart the economy once the stay-at-home orders are lifted.
Most recently, markets have rallied based on the trend analysis regarding the pandemic and hospitalization rates. They have also ticked higher on glimmers of hope that the economy will soon be reopened and that clinical trials have commenced for a potential vaccine that could be available as early as September.
A note of caution. While markets are forward looking, that doesn’t mean they are infallible or always rational. Remember when markets kept rising earlier this year, peaking in mid-February as signs of the pandemic were emerging. Markets were slow to recognize the risk to the global economy, even after the total lockdown in Wuhan, China.
There is still considerable uncertainty about the severity and duration of the downturn and the shape of the recovery. We don’t know how long it will take the economy to reopen. We don’t know if there will be a second wave of the pandemic that may require another partial shutdown. We don’t know what changes in consumer behavior and demand will look like. How long will it take for confidence to return to fly, shop at the mall, dine out, attend a concert?
All opinions and data included in this market commentary are as of 4/29/2020 and are subject to change. The opinions and views expressed herein are not intended to be relied upon as a factual prediction or forecast of actual future events or performance or a guarantee of future results or investment advice.
All investments are subject to risk, including loss of principal. Past performance is no guarantee of future results. Investors cannot invest directly in an index.
The information contained should not be used as the sole basis to make any investment decisions.
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