The S&P 500 has started trading in a range around the Summer 2019 lows, with the Nasdaq index flirting with positive YTD territory. The market is clearly expecting a “V” shaped economic recovery, which the data does not yet support.
From First Trust:
“When the employment report for April is released this Friday, the economic damage from the deepest of the Coronavirus shutdowns will become clear. We estimate that nonfarm payrolls will be down roughly 22 million versus March, and the unemployment rate will skyrocket to around 17.0%, the highest reading since at least 1948.
To put that in perspective, during the subprime-mortgage panic of 2008, payrolls declined 8.7 million over a 25-month period. Now, it looks like we lost almost three times as many jobs in just one month. The highest unemployment rate since the wind-down from World War II was 10.8% at the end of the 1981-82 recession. The jobless rate peaked at 10.0% after the Great Recession.”
The unemployment numbers are so bad that the charts are literally broken. In the coming years we will almost certainly have to remove the first half of 2020 from the weekly jobless charts and show it “ex-covid” because everything else will just look like a straight line.
While 41 states have begun partially reopening their states for business, it is not clear whether or not people will return to normal even if they are allowed to. Data from Opentable suggests that in many cities the dropoff in restaurant reservations had declined by up to 70% before shutdown orders had even been announced. People were sheltering in place before they were told they had to. This could be true on the other side as well, will people actually go back out in to the world and be consumers absent the ‘all-clear’ from health authorities? That remains to be seen, and it is a downside risk to an already battered economy. It is also confirmed in data from Gallup polls, where only 20% of respondents in early April said they would return to normal activities immediately upon a reopening.
US GDP is set to drop by at least 8% in the 2nd quarter. As of now, most economists and pundits are predicting a fairly rapid re-acceleration in the second half of the year, but this assumes that not only will people be willing to go back to normal, but that there won’t be a significant second wave of this virus in the fall that would precipitate another shutdown. While there are many treatments in clinical trials, some showing promise, there is no indication that a vaccine will be readily available until at least the Spring of 2021. The Spanish Flu epidemic of the early 20th century came in multiple waves, with the second wave in the fall being by far the most deadly, almost five times that of the first Spring wave. The market has basically priced in a 0% probability of this happening. All of these below GDP expectations are assuming that there will be no second wave.
These negative points are counterbalanced by the revelations that this virus may be far more widespread and far less deadly on a case percentage basis than had been previously thought. This would mean we are both closer to herd immunity, and perhaps indicate that protecting the vulnerable is a more appropriate strategy than protecting everyone. Multiple antibody studies have shown that the real case count may be understated by between 20-50 times in the US. This would indicate that the virus has already infected up to 50 million people in the US. The following from an article in the LA Times.
Source: https://www.latimes.com/california/story/2020-04-20/coronavirus-serology-testing-la-county
We also haven’t yet mentioned the $7 trillion elephant in the room. This time around, Jay Powell and the Federal Reserve has made it abundantly clear that it will do and buy just about anything to support financial markets. The moral hazard is out the window. The idea of raising rates or shrinking the balance sheet will not be mentioned again for years to come. For those seeing a disconnect between the market and the underlying economics, look no further than the chart below. It is going to be very hard to “Fight the Fed.”
These competing pieces of information paints a very muddied picture of what the world will look like six months from now. Both the bull and bear cases can easily be supported with convincing data, with as wide a spread between the two outcomes as we have seen in our lifetimes. Cautious optimism, hedged expectations, and a watchful eye on unfolding events are the prudent course here.
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All indices are unmanaged and may not be invested in directly. Economic forecasts may not unfold as predicted. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.