Q2 Will Be Ugly
From Lee Sherbakoff, The Nalls Sherbakoff Group, LLC.
The St. Louis Federal Reserve estimates that the U.S. Gross Domestic Product (GDP), the largest measure of economic activity, could contract at an annualized pace of 50% in the second quarter. That’s unprecedented. Yet, forecasts vary widely. In reality, we don’t know how steep the downturn may be during the April-June period.
Claims for jobless benefits have shattered historic highs in the five weeks since the U.S. began to feel the economic damage from social distancing measures adopted to slow the spread of COVID-19. In just a five-week period, the number of first time claims for jobless benefits totaled an astounding 26 million. For perspective, during the 18-month long 2007-09 recession, first-time claims totaled 9.6 million. A sharp contraction in the economy in Q2 is expected, and layoffs are the first, bitter fruits of the economic crisis.
Interestingly the discouraging number of layoffs was brushed aside by investors. Remember, no one rings a bell that sounds the all-clear signal. Collectively, markets attempt to price in future events. I would expect large daily swings, both to the upside and downside, to continue amid the uncertainty.
The jobless figures will exacerbate the already agonizing decision that the President and state governors are confronting on how to balance a need to preserve public health with the necessity to get people back to work. We don’t know if we’ll see an uptick in new cases this summer when the economy reopens. We don’t know if an effective treatment will be developed or how quickly a vaccine might come online. And, for that matter, we don’t know how quickly most folks will venture back into restaurants, airplanes or the public square.
The recovery has been cautiously encouraging, and I believe there are three variables that can be cited.
First, the federal government passed the CARES Act in March and on Friday, President Trump signed the Coronavirus relief package. The bills include over $2 trillion in spending, generous jobless benefits, loans and grants to businesses, stimulus checks, and more. It offers a much more aggressive response than in 2008. More will be needed, but it’s a good start.
Second, the Federal Reserve has aggressively responded. Pre-crisis, there were questions whether the Fed had the necessary tools in its tool kit, given that interest rates were already low. Apparently, they do. With much greater speed than in 2008, the Fed has launched numerous programs aimed at propping up the economy–from big business to Main Street.
The two-pronged attack has not been executed flawlessly, but it has cautiously encouraged investors to dip their toes back into stocks. While the economic outlook remains fluid, investors are trying to discern some form of an economic recovery in the second half of the year.
Third, there are signs the virus may be peaking. On April 17, researchers at the Institute for Health Metrics and Evaluation released new data indicating that the U.S. may have hit its peak in deaths and hospital-resource use. In the past few days in New York State, the epicenter of the global coronavirus outbreak, the daily death toll has begun slowly falling.
I don’t want to downplay the havoc created by COVID-19. We are living in a world that nobody could possibly have envisioned a few months ago. Yet, we are a resilient people. Together we will get through this dark night, and we will be stronger for it.
The Nalls Sherbakoff Group, LLC
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