Market Snapshot – April 12, 2020
MAY- be
Sentiment took a sharp turn higher this week, as the markets looked beyond the virus crisis to what they hope is better days ahead later this year. Spirits were lifted by optimism from the COVID-19 Task Force and from the Fed’s new $2.3 trillion lending program. This, despite another week of over 6 million new claims for unemployment benefits, bringing the 3-week total up to 16.8 million.
Let’s start with the task force, where the medical professionals seem to have lessened their reliance on academic models in favor of actual coronavirus data provided by state governments. Dr. Deborah Birx of the Coronavirus Task Force said that actual data on coronavirus testing and cases provided to the federal government by state governments around the country, rather than models, has become the driving force now in “understanding how to move forward together to really have a different future. The original outbreaks were very large, but the newer ones that we talk about in Washington and Philadelphia and Baltimore it looks like their attack rates–and attack rates in Denver and some of these other states that we have been talking about–are much lower than New York and New Jersey.” This move comes as the academic models that have brought about restrictive social distancing policies at the state and federal level continue to revise death projections downwards and have “vastly overstated” hospitalization projections.
The good news is that we are getting better at collecting data on the outbreak and the administration’s medical advisor, Dr. Anthony Fauci, said that he sees “glimmers of hope” that, despite the worst week for C-virus deaths, thus far, the American public should start to see “the beginning of a turn-around” soon. He noted the decrease in hospitalizations, admissions to intensive care, and requirements for respirators in NY, that suggest that a flattening of the rise in new cases could be a sign that the worst is over. Other parts of the country have already seen a drop in new cases, and California and Oregon have been shipping valuable respirators to where they’re need more, because worst-case scenarios have not panned out there. Both Dr. Fauci and NY Governor Cuomo have credited the mitigation practices in place for reducing the spread of the cases.
The White House hopes that, in the next 4 – 8 weeks, we will be able to open the economy, however some state and local leaders elsewhere in the country have warned that they have not yet reached the peak of their outbreaks, leaving uncertain when the country could relax the isolation behaviors that have collapsed the economy. While few expect the mitigation restrictions to be eased all at once, a phased-in approach, allowing less-afflicted (rural) areas to begin to return to normal, based on the growing ability to track the virus’ trends on a county-by-county basis, seems more likely.
In the meantime, the Fed added to their all-out blitz to help stabilize the US economy, saying it will invest up to $2.3 trillion in loans to aid small and mid-sized businesses (as well as state and local governments), and fund the purchases of some high-yield (junk) bonds, and mortgage-backed securities.
In the Fed’s latest plan, commercial banks will make these loans available to businesses, and the loans will be guaranteed by the US Treasury. Once issued, the Fed will buy the loans from banks, which will make more money available for banks to continue to lend to businesses. This is similar to the mortgage market, where banks lend to homebuyers, and these loans are then sold to government agencies like FMNA and FHLMC which, in turn, makes more money available for banks to lend for more mortgages. Fed Chair Jerome Powell said that “We will continue to use these powers forcefully, pro-actively, and aggressively until we are confident that we are solidly on the road to recovery.” The new Fed program comes on top of the massive stimulus that the Fed announced a few weeks ago and, while it puts the Fed in a more “speculative” position than they have been willing to take in the past, it underscores the Fed’s determination to support US businesses in their time of peril.
The demand for capital is there. Estimates show that commercial (C&I) loans have grown over 80% over the past three months, even before the recent SBA program was rolled out. A good amount of the loan growth has come from companies drawing down on their lines of credit in order to build up cash reserves.
The shoring up is needed. In addition to the spike in unemployment claims, recent data shows:
- Hotel Occupancy rates are down 67% (year-over-year)
- Open Table (online restaurant reservations) are down 100%
- Rail tonnage is down almost 12% (year-over-year)
- Steel production is down 19% (year-over-year)
- TSA (airport) daily screenings: 108,000 (down 97% from average daily 2.38 million)
- Gasoline sales are down 27% (largest annual drop ever)
- Movie theatre weekly box office receipts: $5,000 (down from an average $200 million)
We will see Retail Sales data for March this coming week. Sales had been growing at a 6% annual rate a year ago, and were still healthy through February (up 4.3%). The shift to more online purchases will offer some relief in March, but will not make up for the steep drop in foot traffic and gasoline sales.
Stocks and Bonds: The S&P 500 enjoyed its best week in 45 years as optimism that the worst could be over, coupled with the Fed’s latest relief package, lifted spirits. Helping, too, has been the fiscal response (CARES act), rolled out a few weeks ago, and an acceptance by investors that expectations for earnings growth in the near term will be lowered. The market’s blood pressure, as measured by the VIX volatility index, has retreated from record levels which exceeded even the nosebleed levels last seen in 2008 when Lehman Brothers collapsed in the midst of the financial crisis. While we will see volatility (VIX) ebb and rise along with curve for the virus in the near term, attention should begin to shift toward the prospects for the economy.
If you haven’t yet, we recommend you read the latest Market Insights from Webster Private Bank for more about stocks and investing in this time of pandemic. Go to: WebsterBank.com/PB
Interest rates continue to remain range-bound, with US Treasuries still the haven for the risk-averse, and with a Fed that is a long, long way from considering a rate hike. We will be watching long-term rates for signs that investors are getting concerned over a spike in inflation after the immense amount of “stimulus” and cash infusions from the Fed (the M2 measure of US money supply has risen over 27% in the past three months).
Oil Prices retreated in front of a meeting of the world’s largest producers this weekend who are trying to negotiate an unprecedented 10% cut in global production as the pandemic wipes out demand. Many producers are fast running out of storage room and a number of US shale producers teeter on bankruptcy.
Everyone is feeling the effects of COVID-19, and nowhere is that more apparent than with small businesses. The National Federation of Independent Business (NFIB) index of small business optimism suffered its worst month ever (since it began in 1986) in March, falling to 96.4 from 104.5 in February. Meanwhile, the group’s measure of business conditions six months from now fell 17 points to 5.
These and other data points on the economy will get progressively worse before they get better and Q2 GDP could fall 20%, 30%, or more. It’s hard to tell right now. However, we feel pretty confident that, by the time we get a look at the GDP report for Q2 in July, we will be on our way to recovery and that’s what stocks are focused on. A lot depends on whether we see some relaxing of the shutdown by Memorial Day.
It will take some time to recover from this savage blow to the economy. The progress the markets have made of late is encouraging, but there is bound to be more disappointments and pullbacks while a re-opening is rolled out. Still, we are encouraged to see some light at the end of the tunnel.
Steve Andrews
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