I’d like to say things turned a corner this week, but they did not. We are in a period that is commonly referred to as “finding a bottom.” The Dow Jones Industrial Average (DJIA) hit a low of 18,591 on March 23rd before climbing to 22,552 just a few days later. In the week since, the DJIA has split the difference and sits just above 21,000. I anticipate this see-saw type movement will continue as the market tries to find some footing. It could re-test the lows if the economic data is worse than expected or as the number of infected rises faster than anticipated. However, at this point there is already a lot of bad news priced into the stock market. We don’t anticipate a quick V-shaped recovery but instead recognize that it will take time as the economy begins to recover later this year.
If it wasn’t for the coronavirus, the news cycle would be exclusively focused on the oil market, where demand has dropped by as much as 30M barrels per day (roughly equivalent to the combined output of Saudi Arabia, Russia, and the United States). What is unusual is that this is both a supply and demand issue. While little can be done in the near-term about demand, all countries involved could, in theory, cut their production if only everyone would agree. President Trump this week made efforts to bring Russia and Saudi Arabia to the table to discuss ways to do just that. Oil did better on this news, but a recovery is still some way off.
Not to be outdone, the jobless numbers took center stage on Thursday with an eye-popping 6.6M people out of work, and some states reporting that 10% of their workers are no longer employed. By all accounts, the longest employment boom in U.S. history ended in March. More than 80% of Americans are now under some form of lockdown, leaving state employment offices overwhelmed by an avalanche of applications. To put things in perspective, the total job loss during the financial crisis was about 8.7M, starting in February 2008 and extending through 2009. Today we learned that the unemployment rate jumped from 3.4% to 4.4% with the expectation it could rise to 10% in the months ahead. It is likely that additional fiscal stimulus will be necessary before this is over.
With regards to fiscal stimulus, a new study by Morgan Stanley estimates the U.S. deficit will total at least $3.7T in calendar year 2020 and an additional $3T in 2021, financed by the sale of Treasurys, largely to the Federal Reserve. If the economy shrinks this year, the fiscal deficit relative to the size of the economy could even approach 15% to 20% (those numbers haven't been seen since WWII). On top of all those deficits, President Trump on Tuesday called for a new infrastructure spending bill worth $2T, while the Fed launched a temporary lending facility allowing foreign central banks to convert their Treasury holdings to dollars.
As for corporate earnings, this too will be a little different. The SEC is giving public companies an extension on delivering earnings. Even with the extra time, the reports are likely to be unclear, with many companies withdrawing their guidance due to the economic uncertainty. Analysts are expecting S&P 500 earnings growth to decline 5.2% in Q1, according to FactSet, marking the largest year-over-year decline since the first quarter of 2016.
In closing, I’d like to share an interview with our very own Marc Henn that aired on the evening news this week. Marc was questioned in a segment on WLWT about the relief checks in the latest stimulus package. We are very proud of Marc and value his depth of knowledge on these pressing issues. If you’d like to see this interview, which aired Wednesday evening, click here.
And lastly, instead of focusing on the fear and uncertainty that is ever-present, we encourage you to take this downtime to appreciate your families and loved ones. Take a walk together around the neighborhood, open the windows and air out your home, put together a puzzle, read a good book, or watch the latest Netflix series you might have missed. I highly recommend Ozark with Jason Bateman. Perhaps even cook that meal you all like or just bake some cookies. These difficult times won’t last forever, so you might as well make the best of it.
Bruce J. Mason, MBA