Blog Post

More Monetary and Fiscal Stimulus Confront a Contracting Economy

This week saw aggressive actions from the Federal Reserve and Congress to help ease the pain of the economic slowdown.  The markets, in return, staged a massive relief rally, Tuesday through Thursday.  However, it is our belief, that this is not the end of the bear market.  Looking at history, there were extremely large rallies in October of 2008, yet markets didn’t bottom until March of 2009.  Similarly, there were huge rallies during the Great Depression that fizzled with markets not bottoming out for four years.  Every bear market is different, as is this one.  What we are faced with at this time are unprecedented shutdowns globally to slow the spread of the virus, for which humans do not appear to have immunity.  This globally synchronized slowdown is impacting both supply and demand.  However, unlike most recessions it is not due to an overheated economy and that may help speed the actual recovery.

This week saw the first of some really bad unemployment claims data.  We believe this will get worse over the next few weeks as many have found it difficult to get online to file.    Q1 earnings releases, starting in April will be down, but likely we will see a much bigger negative in Q2 earnings releases staring in July.  We are already seeing many companies suspending stock buybacks, even before being required to in order to receive government help.  Some will suspend dividends altogether.  It is debatable when the lockdowns will end.  The measures being taken now, drastic by U.S standards, were intended to slow the rate of spread.  With roughly 14% of those being infected needing hospitalization, the primary concern is having adequate hospital beds and respirators.  It is estimated globally we have only 10% of the needed number of respirators.  So, let’s say we arrive at the point where the number of new cases starts declining significantly.  Do we instantly go back to life as it was?  Worst case is we will not until there is a vaccine (likely 2021) or an antiviral drug available in huge quantities at reasonable cost (also not likely in the short term).  If we had a large number of tests, we could screen people before they return to work, but we are currently struggling with shortages of tests and only testing those with symptoms. 

Let’s say best case, we get an all clear to go back to work (with precautions) by early May.  How quickly will things recover?  Typically, economic recoveries are slow.  Businesses may start bringing people back to work but not all at once.  In the cases of product shortages (food and toilet paper come to mind) ramping up of production will happen relatively quickly.  Airlines, hotels and the travel industry likely take a long time to recover. 

Looking at China, their authoritarian enforcement of shutdowns were effective in halting the spread of the virus and they are seeing very few new cases.  Factories have restarted but the recovery is slow and bumpy.  Demand for many products in China, especially exports, has faded.  An LED light manufacturer reported that they went back to work quickly and handled the backlog, but new orders were weak and they ended up cutting staff by 30%.  A much larger portion of the U.S. economy is based on consumer spending.  When the economic recovery starts, will people make up for lost time by buying a new car or will they focus only on necessities?

With the major actions taken by the FED and Congress, we see treatment of the symptoms.  There will be better unemployment benefits and cash payments so lower and middle income people can keep up with their bills.  We also believe once we can move freely without relapsing into more infections, there will need to be stimulus at that time to get people to spend more.  Investments in infrastructure and clean energy could help if they get started quickly until consumer demand starts to recover.  However, looking at the post financial crisis stimulus, shovel ready projects were not that readily available. 

Among the further measures taken this week:

  1. The FED announced major steps to fight the economic slowdown including:
    1. Buying an unlimited quantity of bonds including highly rated corporate bonds, short term state and municipal debt and exchange traded bond funds.
    2. Direct lending to small and midsized businesses.
  2. Congress passed and President Trump signed legislation to spend $2TN for:
    1. Provide $500BN to back loans and grants to large companies, state and local governments.  $25BN was targeted to defense contractors.  Treasury Secretary Steven Mnuchin said the U.S. governmetn will take stakes in any company receiving grants.
    2. $25BN in grants and $25BN in loans to passenger airlines.  $3BN to airline contrators.  $4BN to cargo haulers.
    3. $350BN in aid to small businesses.  These will be loans which will not have to be paid back if used for payroll.
    4. $150BN for hospitals and other healthcare providers.
    5. $340BN to supplement government and local efforts to contain the outbreak.
    6. Direct payments to individuals of $1200, $2400 to couples and $500 for each child.  The payments will be phased out for individuals making between $75,000 and $99,000 couples making between $150,000 and $198,000.
    7. Funding to allow states to increase unemployment benefits by $600 per week through July 31st.
    8. Companies receiving aid would be banned from share buybacks through the end of the loan plus one year.
    9. The Treasury Department will be required to disclose the terms of loans or other aid to companies and this will be overseen by a new Treasury inspector general.
    10. Businesses owned by Donald Trump or his family, the Vice President and members of Congress and heads of executive branch departments will be barred from receiving any aid.
    11. States will get $400M in assistance with 2020 elections allowing them to expand voting by mail.
    12. Suspend required minimum distributions from retirement accounts for 2020.
    13. Elimination of 10% penalty for early retirement withdrawals for 2020.
    14. Delay Federal tax payments and filings from April 15 to July 15.

This was in addition to previously enacted legislation to spend $8BN to fight the virus and $100BN to provide paid sick leave to encourage workers to stay home if sick.

Treasury yields fell with the 30-year bond ending at 1.252% and the 10-Year note at 0.692%.  Crude oil ended the week at $21.59 a barrel and natural gas rose to $1.674 MMBTUs.  The U.S. dollar fell sharply against a basket of currencies and gold prices rose to $1624.60 an ounce.

In economic numbers this week:

  • HIS Markit reported the following Flash purchasing managers index numbers showing deep contraction:
    • Eurozone composite PMI fell from 51.6 in February to 31.4 in March.
    • Japan composite PMI fell from 47.0 in February to 35.8 in March.
    • The U.S. Composite PMI fell from 49.6 in February to 40.5 in March.
  • The Commerce Department reported
    • Durable goods orders rose 1.2% in February.  Keep in mind that February was before any virus shutdowns.  Transportation equipment including airplanes and automobiles surged 4.6%.  Excluding transportation durable goods orders fell 0.6%
    • Consumer spending rose 0.2% in February.
    • Personal incomes rose 0.6% in February.
    • The price index for personal consumption rose 0.1% in February.  Excluding volatile food and energy prices rose 0.2%.  Over the previous 12 months core prices rose 1.8%, below the FEDs 2% target. 
  • The Labor Department Reported first time jobless claims in the week ending March 13th rose 3,000,000 to a seasonally adjusted 3.28MM, the largest weekly increase on record. 
  • The EIA weekly oil report is attached.  Also, the EIA reported in the past week:
    • Field production of crude oil fell from 13.1MM barrels per day to 13.0MM bpd.
    • Natural gas storage fell by 29BN cubic feet and is above the five year average at this time of year.
  • Baker Hughes reported the number of active oil rigs fell 40 to 624 and the number of active gas rigs fell 4 to 102.

Remember we are here to support you, to answer your questions and address your needs.  Please do not hesitate to call us.

Best Regards,

Loren C. Rex, CFP®, AIF®, MA                                                  Erik A Smith AIF®

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