Jason Blackwell, CFA, CAIA®
Chief Investment Strategist
April 6, 2020
After several very eventful weeks for the markets, trading was relatively calmer this week. It is hard to fathom that in a week in which we saw the S&P 500 decline 2.1%, and three of those five days experience moves of +/- 2% or more, described as relatively calm. As one of our research providers noted, we’ve spent the last several weeks building up the “horror movie monster” that is COVID-19 in our minds; over the next several weeks, we will know which is more terrifying – our imaginations or reality. We’re likely to get evidence of both.
The virus monster
The virus itself continues to spread, but there are signs that we are succeeding in taming the monster. At last count, the US has reported more than 250,000 cases and 6,500 deaths. New York appears to be the hardest hit, representing nearly 40% of total US cases. More encouraging data from Washington and California, which were among the first to see cases and implement more stringent social distancing guidelines, is hopeful. While the number of cases in these states continue to rise, they have been less than what would have been expected without the intervention. This is proof that containment efforts may be successful in flattening the curve.
Globally, we’re seeing progress as well. Italy has seen an easing in the number of new cases each day last week. Spain seems to have stabilized. In Hong Kong, one of our contacts described conditions as approaching “normal.” While we still believe it is unlikely that public health officials will allow large gatherings at concerts, sporting events, or movie theaters over the near-term, we do see a path towards both virus containment and economic stabilization. In this way, the monster, again seems tamable.
The economic monster
On the economic front, early data into employment has been about as scary as anyone imagined, but the market has largely ignored this news. Following the initial record-breaking report showing 3.3 million Americans filing for first-time unemployment benefits, last Friday’s report had twice that number. Thankfully, the recently passed CARES Act increases the social safety net providing for these individuals. A silver lining from Friday’s report was the ability of state unemployment agencies to process over 9 million unemployment claims over the past two weeks. However, reports suggest that more claims are yet to be filed.
Deploying fiscal relief in the fight against the monster
One of the hallmarks of the CARES Act is to provide support to employers to maintain their payrolls. On Friday, small business owners around the country flooded banks with applications for the Paycheck Protection Program, which offers small businesses up to $10 million in forgivable loans backed by the Small Business Administration. By Friday evening, it was reported that banks had processed more than 10,000 loans totaling $3.2 billion of the near $350 billion allocated to the program. While the process is still confusing to many small business owners, given the short turnaround time, this is not unexpected.
Fiscal policy makers have already begun discussing ideas for a Phase Four or even Phase Five stimulus bill. Any future action is likely to increase the size and scope of current programs, in addition to considering more politically sensitive infrastructure spending programs. While we have been pleased to see rapid action from Congress to date, we expect to see much more contentious debates in the coming weeks and do not expect policies to be as swiftly enacted.
To be continued…
We remain hopeful that the monster proves to be less scary than our worst fears. Certainly, there is more work still to be done, and headlines regarding the virus and the economy will continue to deteriorate before getting better. As such, volatility is likely to continue and forecasts that the markets have bottomed are only guesses. As we’ve said in the past, volatility can present both risks and opportunities. We believe that sticking with a long-term strategic target is the best course of action during these highly uncertain times.