It is hard not to start a market update with the following graph.
The economy of the United States is firmly in the hand of the people and their comfort with the state of the Coronavirus. Ask yourself the following questions:
1. When would you feel comfortable going to the grocery store?
2. When would you feel comfortable enough to eat out IN a restaurant?
3. When would you feel comfortable enough to go to a sporting event/play/show?
4. When would you feel comfortable enough to send your kids to school?
5. When would you feel comfortable having dinner at your house with the grandparents?
The data surrounding the virus will ultimately give us comfort or not. We continue to be in the camp that the jury is still out. There is not enough data for the US consumer to digest that makes them feel comfortable enough resuming the same activities as before this outbreak. This is why most of the major investment banking houses are clearly guessing on how the economy is doing.
The hard data is coming in definitively negative. March factory orders declined 10.3%, which is the largest drop on record; auto sales have fallen off a cliff, below that of the recession of 2008; and the unemployment claims chart looks positively bizarre.
So what propped up the market in April? It could have something to do with the $2.3 trillion dollars that the Fed has pumped into the economy. To put that into perspective, prior to the US shutdown, the US economy moved roughly $22 trillion per year; $2.3 trillion is closed to two months of total output. The government definitely wanted to throw a big stick to keep the economy rolling. They succeeded.
Our concerns going forward land in several different camps. First, when will we be able to open up the small business part of the economy? They have been hurt the most from the shutdown, and need help getting back on their feet. This will depend on the consumers.
Second, when will the travel and hospitality industries be allowed to open? Government regulations are only part of the story here. If you can travel, will you?
Third, where will the energy prices settle? It appears that Russia and Saudia Arabia sure picked a really lousy time to get into a war over oil market share. Watching oil prices go negative was certainly “must see” TV, but it will have a long lasting impact on the industry. Companies will and must go bankrupt. If that is allowed, the oil industry in the US will come back better and stronger. We will see if that will happen or the government will step in and bail them out with more debt that they would eventually have to pay back.
And lastly, will the government support help or hinder the aftermath? After the initial $2.3 trillion that the Fed has thrown into the system, another add-on was made bringing that total to almost $4 trillion. Indeed, the government does have printing presses, but someone needs to hold this debt. The borrowing will hit an unprecedented (there is that word again) $2.99 trillion by the end of June. Anyone want to buy a bond? It is hard to imagine with this type of issuance that interest rates will not eventually go up, after all – there is no free lunch. The idea of the program is to keep demand in the economy until we can open up business again and get back to business as usual. That, my friends, will be up to you.
As always, please do not hesitate to contact us if you should have any questions.
May 8, 2020