Everyone you and I know has been affected by the coronavirus.
It’s likely that by the time this is over, every human on the planet will have been affected by COVID-19.
Though it’s sad that it took a disease to bring us together, it reminds me of how deeply connected we all are and how much our daily existence depends not just on our community, but on people we’ll never meet in far-flung corners of the world.
That very interconnectedness is what’s making this pandemic so dangerous to us and the economy.
We believe the US entered a recession in March, and the latest data continues to show the economic damage:
- Retail sales dropped 8.7%, the biggest drop since the government started tracking the data in 1992.
- Spending on travel, restaurants, and shopping overall is way down (though grocery sales and delivery are up).
- Airline travel is down over 95% year over year.
- The number of new unemployment claims released Thursday morning pushed unemployed people to over 30 million, completely erasing the job gains over the past decade.
Despite the ugly economic data, stocks in April wrapped their best monthly performance in decades.
Why? The most likely explanation is “irrational exuberance,” to quote Alan Greenspan. Stocks are famous for rallying in the face of bad numbers, and it’s clear that investors are expecting government stimulus to lead to a quick recovery as states emerge from lockdown and business picks up. Regardless, it’s likely that volatility will return.
Are bullish investors right? Will the economy recover quickly?
It’s impossible to say right now but we certainly hope so. How long the downturn lasts and how soon the economy recovers depend on answers to some critical questions:
- When will widespread testing, tracing, and treatment allow lockdowns to ease? Reopening America too soon and igniting a fresh wave of the pandemic will prolong the pain. Singapore is an example we are following closely. Are Americans ready to adopt technology that traces our every movement if it potentially makes us safer from Covid-19?
- Will employers maintain relationships with their laid-off staff? You can’t just flip a switch and reopen a closed business without skilled workers. The longer the shutdowns continue, the harder it will be for companies to staff back up.
- How soon will consumer spending return? All of McDonald’s restaurants in Wuhan, China are open, but they are operating at roughly 10% capacity. How long can a lot of smaller businesses in the US remain open with only 10% of their business back after the shutdown?
- How much business is gone forever? “Deferred” demand that’s pent up and just waiting for restrictions to ease could cause spending to surge; “destroyed” demand that’s not coming back could cause spending to remain depressed for longer. Here’s a simple example: deferred demand would be rescheduling a canceled vacation. Destroyed demand would be deciding to skip it entirely.
V, W, L, or Swoosh?
The “shape” of the eventual recovery is being hotly debated because it gives us insight into what would need to happen (and how long it could take).
“V-Shaped” Recovery: A short, sharp decline and then a quick rebound is the best-case scenario. In this case, lockdowns lift soon and spending surges, driven by pent-up demand and government stimulus.
“W-Shaped” Recovery: A “double-dip recession” is a worst-case scenario that could happen if the easing of restrictions leads to another wave of infections and lockdowns, or the economic damage causes a second downturn.
“L-Shaped” Recovery: An L represents a sudden plunge and fitful recovery if lockdowns continue through the year and growth is slow to return.
“Swoosh-Shaped” Recovery: A tick or swoosh is a sharp downturn followed by a gradual recovery as lockdowns are eased cautiously across the country.
We can’t predict what the road ahead will hold, but as portfolio managers, we position your portfolios based on the probability of each of these outcomes happening. We do think however, it’ll look less like a return to “normal” and more like a way to live with the way COVID-19 has overturned ordinary life.
For those that have a mortgage on their primary residence or a vacation home, we have seen rates drop into the high 2 percent and low 3 percent range in the past few weeks. It may make sense to look at refinancing any debt that is above 4%. Please feel free to call us to discuss rates if you fall into this category.
As always, thank you for the trust and confidence you place in our firm. Have a good weekend.