Joel’s Weekly Talking Points – 4/27/20

1. Coronavirus: Some states are beginning to reopen their economies, mostly in limited areas and spaces.  For example, hair and nail salons have reopened in Georgia, but Pennsylvania has eased some delivery and pickup restrictions.  For the most part, the rest of the nation remains in a state of confinement.  We’ll know how these reopening’s fare in the coming weeks if we see an uptick on COVID-19 cases or not.
2. Economic Impact: We are just starting to get a glimpse of what the economic shutdown is doing to economies worldwide. France for example recently had a Markit Services PMI number of 10.4 (as a reminder PMI’s above 50 signal expansion and below 50 contraction).  This number typically hovers between 40-60 and a 10.4 is, well – was, unheard of.  In my opinion we are just getting started with “bad” economic numbers.
3. US Unemployment:3 million, 6.6 million, 6.6 million again, and 5.2 million. Those are the last four weeks of initial unemployment claims in the United States.  The previous record was 695 thousand in 1982.  The shock of the economic stoppage is just starting to take hold – for now, the Federal Reserve and Congress have stepped up to the plate in a big, big way in my opinion.
4. What about the debt?: According to First Trust: “The Congressional Budget Office recently updated its forecast for the budget deficit for the current fiscal year (ending September 30) and expects it to be about $3.7 trillion, or roughly 18% of what we estimate to be fiscal year GDP. To put that in perspective, the budget deficit hit 9.8% of the GDP in 2009 and the deficit peaked at 29.6% of GDP in 1943.”  Several Government officials have compared the fight against COVID-19 to a “war” – at least from a spending standpoint they are following through on that rhetoric.
5. The good news: – I believe that the US avoided “Financial Crisis 2.0” with the actions the Fed and Congress took in March. Before the Fed stabilized markets and Congress passed the CARES Act I saw several cracks in the financial system that were reminiscent (to me at least) of 2008.  I witnessed the drying up of liquidity in money, treasury, and other bond markets at the same time as a significant stock market pullback.  Once the Fed stabilized markets and Congress acted quickly (for them anyway) markets appeared to stabilize and behave more normally.
6. Fun information for the week: PRESTO! – The Fed’s balance sheet reached $5.45 trillion as of 4/22/20, up from $3.85 trillion as of 2/26/20. The $1.6 trillion balance sheet increase in less than 2 months is the result of digital creation of money by the Fed, i.e., money used for purchases or lending created with the press of a button (source: Federal Reserve).

Bottom line:  In most portfolios we remain cautious in the short-term.  As an investment committee, we have been surprised by the resiliency of risk markets in the face of unprecedented economic turmoil.  This is a good thing – the panic selling from March seems to have faded, for now.  We still have a lot of earnings to go through for Q1 and economic data releases in the coming days and weeks but the reality is, this is all about the virus.  Do we have it under control?  Will opening the economy now result in a second wave, and what does the virus look like in the Fall when Flu season comes back?  These questions are obviously unknown at this time, but as always we remain data-driven in our investment decisions and will continue to monitor the economic and health situations as they unfold.

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