L U or V
Those 3 letters represent the possibilities of the economic recovery following the COVID19 shutdown. An “L” shaped recover would indicate that there would be no economic recovery coming out of the shutdown. A “U” shaped recover would indicate that the economy would struggle along for a period of time after the shutdown and then see a robust recover that would take activity back to pre COVID levels. A “V” shaped recover would be a quick and robust recover after the shutdown which would quickly attain the economic strength that was present pre COVID.
I believe that the recovery in the equity market off the lows indicates a number of investors are predicting a “V” shaped recovery in the economy. After experiencing one of the quickest and most dramatic historical selloffs in equity prices, since the low, the S&P has had its largest 50 day rally in history. Unfortunately, the economy and the market are two different animals. The dramatic actions taken by Governments to prevent spreading of the virus (mandatory stay at home orders, travel restrictions, closing of businesses) resulted in 20 Million (emphasis on MILLION) became unemployed in April, according to the Department of Labor report. That wiped out a decade of job gains since the Great Recession ended.
In response to the financial hardship imposed on their constituents, Congress, the Administration and the Federal Reserve have acted swiftly and decisively to provide assistance. Congress has authorized over 3 Trillion dollars in aid to individuals (checks, expanded unemployment benefits), small businesses (PPP) and large companies (TARP and Main Street Lending). While these actions have cushioned the hardship of the shutdown, they can’t solve all the problems. I think the major reason is because the Federal Reserve can solve for liquidity, it can’t solve for solvency. What I mean by this is that they can lend but they can’t keep insolvent companies open.
Imagine if you run a small restaurant or dress shop. You can reopen with funds that have been extended to you but if you are only allowed 25-50% capacity with social distancing and other restrictions making a profit will be extremely challenging. Small business, the main stay of employment in the economy, usually run on a small profit margin. With most cost fixed, revenue needs to reach a high level to turn a profit, which would be difficult under the restrictions. That assumes that your workers will return. Currently, those receiving unemployment benefits gather an additional $600 per week. In Illinois, the average benefit is around $325 per week. With additional funds, an unemployed worker would receive a payment equal to almost $50,000 annually. While being unemployed is a horrible situation to be in, there is no financial incentive to return to work until the additional funds cease. The additional funds were necessary and proper. These workers were put out of work due to mandated shutdowns.
Unless extended, much of this assistance will expire at the end of July. The additional unemployment benefit will cease, the PPP loans (which began at the beginning of May) only provided for two months of salary. Even if the monthly employment reports repeat the stellar May report (2 Million added to payrolls) there will still be almost 15 million people unemployed and the unemployment rate will be above 10%. So, unless there is additional assistance from the government, I think there is going to be a dramatic slowdown in the economy.
I think the market is pricing in the wrong letter for a recovery. Most states are currently in some type of reopening. It remains to be seen how the virus will spread as restrictions are lifted. The good thing is that the medical field knows more about how to treat the virus and there are significant developments in a vaccination and possible cure. However, these won’t be available for a number of months.
Finally, not to lost in all this is the 2020 elections. The White House and the Senate are in play. I am not going to make a political statement towards either party. I will point out that should the Democrats gain 3 seats there would be a 50 50 tie in the Senate. If Biden, the supposed Democratic nominee, wins the White House, the Democrats would hold the tie breaker and control both Chambers of Congress. This would allow unopposed action to implement their policy. I would suggest reading Biden’s plans should he win. Should either Trump win or the Republicans hold the Senate, then expect more of the same past 2 years.
Regards and please feel free to call and discuss. 6 /11/20
The opinions expressed herein are those of Riverbend Planning Group. The data and opinions are furnished for informational purposes only and should not be considered a solicitation for an investment decision. Although it is derived from sources believed to be accurate, Riverbend Planning Group makes no guarantee to the accuracy of the informationBack to Blog