The economy: the worst ever?

An Oxford Harriman & Company Commentary

Not surprisingly volatility continued last week with swings to the upside and downside throughout the week. We had a move to the upside early in the week on optimism for the economy reopening and hopes for a COVID-19 treatment before another wave of bad economic data and multiple disappointing earnings reports saw stocks pullback to end the week.

After an awful March April provided a much-needed snap back and the best month the US equity markets have seen since 1987. The rest of this commentary will be a recap of April.

 

Aggressive Fed action

Comments were made during March that the Fed is ready to step in and do whatever is necessary to support the economy. While Jerome Powell did not actually say this, the Fed’s actions imply this is the case. We experienced unprecedented support from not just the Federal Reserve, but also the European Central Bank (ECB) in March.

It appears the Feds quick and decisive action has renewed confidence for American investors.

 

The economy: the worst ever?

The economy is in a free-fall.

Over a six-week period, there have been 30 million first-time claims for unemployment insurance (through April 25).1 This is the worst six week claims number we have seen, and it’s difficult to comprehend the stress being inflicted on these families.

The U.S. economy also saw a 7.5% decline in consumer spending in March, the largest decline on record. 2 Additionally, U.S. Industrial production declined 5.4% in March, the worst decline since the end of World War II. 3

It’s likely we will see further economic contraction this month as April’s numbers are reported. According to Fed Chairman Powell: “Many standard economic statistics have yet to catch up with the reality we are experiencing,” “Manufacturing output fell sharply in March and is likely to drop more rapidly (in April) as many factories have temporarily closed.”4

This health crisis has very quickly fueled an economic crisis unlike anything we have seen in many decades. According to Powell: “The severity of the downturn will depend on the policy actions taken at all levels of government to cushion the blow and support recovery when the crisis passes,” 4

As we will see below, the markets seem to have confidence in the early actions by the Fed.

 

Best monthly gains in stocks since 1987

During April, the Dow Jones Industrial Average and the S&P 500 recorded their best monthly gains since 1987 5 The performance of the stock market is obviously a disconnect between the financial economy and the real economy.

The previous four-week 34% decline in the S&P 500 qualifies as a bear market, as stocks fell at a rapid pace as investors sensed the economy was running into a COVID-19 wall. Conversely, the rally over the last month has been nothing short of astonishing given the current economic environment outlined above.

 

How might we explain the disconnect?

The Fed’s unlimited firepower has not been enough to prevent a debilitating economic decline, but its unprecedented steps have thus far prevented an economic crisis from developing into another financial crisis, with a massive amount of liquidity and a promise of more support helping to fuel the increase in stocks.

Further, government stimulus of over $2.5 trillion is helping sentiment. Talk of a vaccine or treatment that could end the pandemic has been a factor. To be clear, we still have the main cause of uncertainty with COVID-19. We also believe investors are looking to 2021, and the anticipation that corporate profits and the economy will rebound.

Of course, the outlook is very uncertain. Have investors been too optimistic?

Additional government spending and support may be needed to jumpstart economic activity, as Powell alluded to in his press conference. Deficit hawks may cringe at talk of new spending, and the new economic support initiatives have not been without their problems. However, as of this writing, fiscal stimulus has received strong bipartisan support.

Another potential risk is the unknown as large portions of the economy start to reopen. It will be interesting to see how quickly people return to their normal life once permitted to move and spend freely. There is no guarantee this will go as expected, as it is impossible to predict human behavior, especially given this is the first pandemic we have experienced. It is unlikely consumer’s behavior will return to normal as the economy opens as social distancing at restaurants, airlines, and industries that require person-to-person interactions could limit activity and sales.

 

Have we seen the bottom?

The market gains in April appears to suggest some type of economic bottom is in sight. Think of it like this: The level and the direction of stocks is the equivalent of the collective opinion of “the market.”

They are not simply opinions, but real people and institutions that buy and sell equities, effectively putting their money where their mouth is.

No one has a crystal ball. No one can tell you where stocks might be at the end of the year. There are too many unknown variables. Those who make forecasts are simply offering opinions.

We understand the uncertainty facing all of us. We are dealing with an economic and a health care crisis that none of us have ever faced.

Let me emphasize again that it is my job to assist you. If you have any questions or would like to discuss any matters, please feel free to give me or any of my team members a call.

Thanks, and enjoy the rest of your week.

 

Sincerely,

Dennis P. Barba, Jr.
President & Managing Partner

Sources:

1. https://fred.stlouisfed.org/series/ICSA

2. https://fred.stlouisfed.org/series/PCE

3. https://fred.stlouisfed.org/series/INDPRO#

4. https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20200429.pdf 5

5. https://www.marketwatch.com/story/after-a-blockbuster-april-for-the-dow-and-sp-500-is-sell-in-may-in-the-coronavirus-era-a-smart-strategy-2020-04-30


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