As COVID-19 and economic uncertainty spur unprecedented market volatility and policy response, see below for perspectives on current economic and market conditions as of March 25, 2020 from New York Life Executive Vice President and Chief Investment Officer Tony Malloy.
March 25, 2020
- The coronavirus (“COVID-19”) continues to weigh on the capital markets and the economy far more than the initial estimates proffered just a few weeks ago.
- When news of COVID-19 first caught the market’s attention, the early forecasts for second quarter virus-affected GDP growth were centered around a negative 2.0% annualized rate (down from a positive 2.0%), with a rebound to slightly positive in the following quarter. An unpleasant but digestible contraction followed by a V-shaped recovery.
- As of now, however, there is a wide-range of estimates towards the economy contracting between 10% and 20% in the second quarter of 2020, with some forecasts coming in even lower as each day passes.
- To provide context, this decline would be far greater than the one that occurred during the depth of the Great Financial Crisis (“GFC”) in 2008-2009 and would be the worst one-quarter contraction since Q1 1958.
- The reason for this is the unprecedented shut-down of large portions of the economy to help slow the spread of COVID-19. As of this writing, nearly 1 in 4 Americans were being told to stay home to “flatten the curve” and reduce the anticipated strain on our healthcare system, which risks being overwhelmed.
- In a span of only fifteen years after the founding of Facebook introduced “social networking” to our modern lexicon, the Center for Disease Control (“CDC”) has recommended “social distancing” in hopes of reducing the spread of the virus.
- Domestic equities are now down over 30% from the peak in February – just four weeks ago. While this is not the worst decline in market history, it is the most rapid.
- The steepness of the decline is even faster than the crash of 1987 and we had two of the worst days in stock market history in the past two weeks.
- In comparison, stocks tumbled 57% during the GFC and 49% after the dot-com bubble burst in 2000 before beginning to rebound.
- Adding to this stress, is the oil price war that has broken out between Saudi Arabia and Russia. Oil has dropped below $25 per barrel, a level not seen in 18 years, causing additional pressure in the energy sector and in both the equity and credit markets.
- In the treasury markets, the Federal Reserve has lowered short-term interest rates to ZERO, resumed their bond buying program to lower long-term interest rates, and injected liquidity into the financial system to help stabilize the capital markets.
- With everyday life grinding to a halt from New York to California, the depth of the hit to the economy will be dimensioned by the length of the mandated shutdowns occurring throughout the country.
- Sentiment is about as low as it can get as people are worried about their health, their jobs and their finances simultaneously. It is generally when all hope is lost that lasting bottoms are formed.
- While no one can predict when that will occur, there are indications that we may be close. Some equities are trading at valuations that are attractive in even the most difficult economic environments. Some A-rated bonds issued by blue chip companies are trading at yields where the BB-rated high yield market traded a month ago.
- If we are to repeat the pattern that has occurred elsewhere, markets may not have a sustainable lift until the rate of new virus infections start to decline, which some forecasts indicate could be 4 to 6 weeks away.
- As despair is priced in the markets, it could only take a whiff of good news to spark a meaningful rally. The system has encountered other significant shocks and survived. It will survive this one, too.
- That spark may have arrived today. In the pre-dawn hours of March 25th, the U.S. Congress agreed on a record $2T stimulus package, dwarfing the $800M package passed in 2008, which includes:
o $500B in loans for distressed companies
o $350B in small business loans
o $250B in unemployment insurance benefits
o $250B in direct payments to individuals and families o $150B in aid to hospitals and healthcare providers
- Senate majority leader Mitch McConnell summed up the historic stimulus package saying, “In effect, this is a wartime level investment into our nation.” With minority leader Chuck Schumer exclaiming, “Help is on the way.”
- Markets will likely remain volatile, but time will tell if they have found a bottom after the equity markets advanced 10% on the news of the Stimulus package approval.
• On Monday, March 23rd the Fed announced extensive new measures to support the economy above and beyond their recent action of taking the Fed Funds rate to zero.
o Extended their commitment of providing market liquidity by purchasing “amounts needed” in US Treasuries and Agency MBS, essentially uncapped Quantitative Easing.
o Establishing two facilities to support credit to large employers – Primary Market Corporate Credit Facility and Secondary Market Corporate Credit Facility, essentially two facilities introduced to purchase corporate bonds.
o Created a third facility - Term Asset Back Securities Loan Facility (TALF) – to support the flow of credit to consumers and businesses. Enable issuance of student loans, auto loans, credit card loans, and SBA loans.
o Announced intentions to launch a Main Street Business Lending Program to support small and medium size businesses.
• The Fed summarized their actions best, “Taken together, these actions will provide support to a wide range of markets and institutions, thereby supporting the flow of credit in the economy.”
- Initial policy responses during times like these are generally viewed as inadequate and the structure of policymaking in the U.S. creates an inherent delay until sufficient measures are implemented.
- In 1933, President Franklin D. Roosevelt – himself diagnosed with polio, an epidemic that also led to closure of public facilities – declared, “The only thing we have to fear, is fear itself.”
- We have come to think of that famous utterance as referring to public fears about the Great Depression generally. In fact, FDR was referring to a specific kind of fear: the “nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”
- In the 100 days that followed, Congress heeded Roosevelt’s call and began converting retreat into advance.
- The relief bill spearheaded by House Speaker Nancy Pelosi and signed into law by Donald Trump last week was an important first step in helping American workers hit hard by the crisis. Its main provisions - including creating temporary paid leave for many workers, extending unemployment insurance and providing more funding for food stamps and children’s health insurance- will strengthen the nation’s safety net.
- This week, Congress is expected to announce a series of fiscal stimulus measures to bring the economy back to normal. This includes providing income to people so they can survive at home, in addition to extending credit to businesses to help weather the storm.
- While in recent times our country has been polarized between red and blue, my hope is that this crisis brings people together. To paraphrase Winston Churchill, “never underestimate the ability of the Americans to do whatever it takes, after they have exhausted every other possibility.”
- Private companies are rallying to help solve the crisis, akin to war-time footing, with recent examples of private manufacturers producing respirators and masks and biotech companies developing virus tests and potential vaccines.
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