The last week’s market highlights:
Quote of the week:
“Make me an angel that flies from Montgomery
Make me a poster of an old rodeo
Just give me one thing that I can hold on to
To believe in this living is just a hard way to go.” ̶ John Prine
Make me a poster of an old rodeo
Just give me one thing that I can hold on to
To believe in this living is just a hard way to go.” ̶ John Prine
We barely noticed that bear market
After hitting a new record-high level of 3,386 back on February 19, the S&P 500 Index quickly—and we do mean quickly—reversed course. From February 20 through March 23, economic lockdowns designed to contain the global spread of COVID-19 sent the index plunging to 2,237. That’s a 34% drop from the S&P 500’s most recent peak, far exceeding the 20% threshold that technically defines a bear market.5
But since that trough, the index has rebounded 24.7%, thanks mostly to its 12.1% gain in last week’s shortened trading week. (U.S. markets were closed on Good Friday).
What sent the bear back into hibernation?
- A flatter contagion curve. The virus has shown signs of peaking in continental Europe, with a slowing number of daily new infections and fatalities in Spain, Italy and France. Amid hopes that the worst of the crisis may have passed, Austria, the Czech Republic, Denmark and Norway may begin to open some stores and schools by the end of the month. Last week also brought better news from New York City, the epicenter of the crisis in the U.S. The growth rate in new COVID-19 cases and hospitalizations there declined sharply, signs that social distancing, working from home and shutting non-essential businesses may be beginning to stem the tide.
- Prospect for higher oil prices, as Saudi Arabia and Russia returned to the bargaining table to discuss production cuts. These two large producers had been engaged in an oil price war, leading to a global oversupply at the same time demand was collapsing in the face of COVID-19. Although the energy sector makes up a small percentage of the S&P 500, the prospect of an oil rally from recent multi-year lows boosted sentiment.
- A bold Fed. Less than three weeks after launching an unprecedented monetary policy “bazooka,” the Fed brought even more firepower to the fight, announcing up to $2.3 trillion of fresh stimulus on April 9. Timing was key: The Fed’s move came in the immediate wake of labor-market data showing another 6.6 million people had filed first-time unemployment claims, bringing the total over the past three weeks to nearly 17 million.6 The Fed’s aggressive action, announced just as those grim numbers were released on Thursday, helped calm markets and kept equity bulls in a buying mood.
Highlights of the Fed’s latest stimulus include:- A municipal lending facility, which will provide up to $500 billion directly to states and municipalities, supporting their short-term cash flow needs while stopping short of purchasing munis directly in the secondary market.
- A Main Street lending program (MSLP). This will help businesses too large to be eligible for the small-business-focused “Paycheck Protection Program” (part of the Fed’s March stimulus) but not large enough to raise capital though the corporate bond market. Under the MSLP, the Fed will buy up to $600 billion in loans made by banks to these mid-sized companies, thereby clearing the banks’ balance sheets and allowing them to lend again.
- Expanded support of corporate credit markets through QE. The Fed had already announced that for the first time it will purchase investment-grade corporate debt in both the primary and secondary markets as part of quantitative easing (QE). Last week it added riskier, high-yield bonds through exchange-traded funds (ETFs) to its list of QE-eligible assets.
More than any other “actors” during this crisis, Fed Chair Jerome Powell and his colleagues have exceeded the market’s expectations—and ours. Although the Fed’s blasts of stimulus won’t prevent the inevitable economic damage that’s coming over the next few months, they will go a long way toward allowing businesses and households to heal when the economy reopens.
A second Great Depression? Highly unlikely.
After a strong January and February, the U.S. economy ground to a halt in March, evidenced by the stunning rise of weekly jobless claims and last month’s loss of 701,000 payrolls. With much of the country shut down in April, and the lockdown expected to continue at least until May, second-quarter GDP growth could potentially clock in at a jarring -25% or worse. But keep in mind that quarterly GDP growth rates are annualized, so even if such a dire scenario were to occur, the contraction for the quarter itself would be “only” 6%-7%. Still, an annualized double-digit downturn would mean a recession—broadly defined as two consecutive quarters of negative GDP growth—is a near-certainty.
Merely mentioning the possibility that the economy may shrink at a 25% rate, even for a short period, brings to mind the Great Depression of 1929-1939. Could the U.S. be headed for another one? No, not in our view.
To be clear, we’re not expecting a sharp, “V-shaped” recovery. That would require a quick, robust, and sustained economic turnaround, and there are still too many unanswered questions related to the coronavirus itself and what the economy will look like as activity returns. But we’re cautiously optimistic that certain segments of the economy, perhaps starting with small businesses such as restaurants and retail shops, will begin to open up during the summer. Against that backdrop, growth in the third quarter (July through September) will likely be positive, making the 2020 recession painful but brief—shorter, in fact, than the one triggered by the 2008 financial crisis.
Buffers that should help cushion the downturn include:
- Generally strong household balance sheets. February’s personal savings rate (+8.2%) was close to a 30-year high, while debt service costs remain near a 40-year low as a percentage of household income.7
- A healthy banking system. New regulations implemented after the 2008-09 financial crisis have strengthened banks’ balance sheets. Fed Chair Jerome Powell stated as much last week, noting that he didn’t believe U.S. banks will need to suspend paying dividends in 2020 to preserve capital, as European banks have agreed to do.
- Swift, expansive global stimulus. The Fed is not the only central bank taking action. Since mid-March, the European Central Bank has announced a series of stimulus packages totaling over €1 trillion (just shy of $1.1 trillion). In the emerging markets, monetary policy has been amped up in Latin America. Central banks in Brazil, Chile, Mexico and Peru all moved early and aggressively. On the fiscal policy front, the U.S. Congress has begun discussions on a round of aid to supplement the CARES Act. And last week, eurozone finance ministers announced a €500 billion ($550 billion) rescue plan. China, meanwhile, is poised to spur infrastructure investment, backed by 2.8 trillion yuan (about $400 billion) of local government bonds.Ultimately, only time can reveal the scope of the economy’s fall and subsequent recovery. For now, however, consumers and business owners are understandably feeling grim. Both the preliminary University of Michigan consumer sentiment index (for April) and the NFIB small business optimism gauge (March) suffered their worst one-month declines on record.