COVID-19: Should we be as confident as the markets?
New confirmed cases and COVID deaths continue to show encouraging trends in both Europe and New York State. It is too early to call a top in the US nationally, but predictions for the ultimate death toll continue to fall. The recent newsfeed is full of interesting pieces on the research being performed on a number of topics including the level of incidence (of true case counts vs. reported/confirmed cases); how the virus affects those infected (especially the sickest); and potential therapeutic treatments. I continue to be impressed and encouraged by the speed with which we are learning about the virus while also sobered by the degree to which every new data point or insight leads to new questions.
As progress continues in the current phase of our fight against the virus, more attention is being trained on supporting the economy. The US is forming a second coronavirus taskforce to focus on planning for emerging from the lockdowns and restarting economic activity. Administration officials are signaling at least some limited/rolling economic restart as early as May. In the meantime, the Fed announced Thursday that it is expanding the emergency lending backstop to provide credit support for ~$2.3TN of lower-rated assets in a bid to ensure credit availability to mid-sized companies as well as states and municipalities. On the fiscal side, the IRS moved to accelerate delivery of support payments to individuals, and while Senate Democrats blocked an expansion of the forgivable small-business loan program included in the US stimulus package (from $350BN to $600BN in total), most observers seem to believe that ultimately this will pass. In Europe, EU finance ministers agreed to a €500BN economic support plan, though they stopped short of committing to joint debt issuance to finance the recovery.
These actions are all precipitated by the unrelenting bad news on the private sector’s real economy. Thursday’s US report for new unemployment filings showed 6.6MM newly unemployed workers in the latest week, bringing the three-week total to 17MM. All parties expect that the economic situation will get much worse before it improves. JPMorgan released a new report predicting 25MM US unemployed by the end of April, with unemployment peaking at 20% and a 40% contraction in US GDP for the second quarter. In an address to the Brookings Institution on Thursday, US Fed chairman Jerome Powell said that the U.S. economy is in an emergency and is deteriorating “with alarming speed.” Airlines are expecting a protracted slump in demand and may cancel as many as 90% of flights through the summer. Boeing is considering cutting 10% of its workforce. And US home sales listings, which usually ramp up ~50% or more in March in preparation for the warm-weather peak sales season were instead down 27%.
Despite the cavalcade of miserable economic news items, markets looked past extreme weakness in current conditions and continued their recovery from recent lows. Stock markets were up around the world Thursday, with US equities rising about 1.4% during regular hours and somewhat higher in after-hours futures trading. Overall, US equities were up about 12% this week, making it the best week overall since 1974 [equity markets are closed today in observance of Good Friday]. US equities had crashed over 35% from their peak on Feb 12 to their recent low on Mar 23. They have since recovered a little less than half that ground on the back of improving epidemiological statistics (the apparent/imminent peak in new cases and deaths) and both the implementation and further promise of massive fiscal and monetary stimulus.
Part of that rebound was clearly warranted – some of the worst days in the crash were marked by indiscriminate panic selling. That said, it seems to me that markets are taking a big bet on early re-openings and the ability to achieve and maintain a reasonably high level of economic activity in the near term. They could be exposed to another major setback if those hopes prove unwarranted. Obviously, published economic statistics are lagging indicators, while markets are leading. But Powell’s remarks to the Brookings institution were sobering. He endorsed the idea of the administration’s reopening task force. But he also emphasized the gravity of the economic collapse and made a more conservative July estimate for reopening. Given the Fed’s actions, he clearly believes we are in a historic emergency that justifies the most aggressive monetary stimulus ever applied to the US or global economy.
Looking out further, even in the best-case scenario, we are piling up a mountain of debt that we will have to carry for (at least) decades to come. The pre-crisis demographic picture of a shrinking prime-age worker population supporting ever more numerous retirees already boded ill for long-term fiscal balances. Even if we escape depression and are back on a more or less normal footing in the real economy in six to 12 months, the new debt overhang will loom over the global economy indefinitely.
About this article
Like everyone, I am trying to make sense of the current situation. For the past month, I've been writing daily reflections to help myself and my colleagues make sense of an enormous amount of information and think beyond the day’s headlines. I now offer these thoughts to you in a series of articles aimed to provide perspective and help you navigate the rapidly evolving COVID-19 situation. I hope you find them useful and welcome your thoughts and comments.
About me
Current President of Marsh Client Advisory Services. Former Oliver Wyman Partner. Avid writer and reader. Husband and father of three.