By Carlos A. Estrada-Sanchez
The question we are asking each other today – Is the bottom in? It is undoubtedly a fact that COVID-19 has brought much chaos to our lives, and the markets have reacted accordingly. In the beginning of January, the S&P 500 saw a major and drastic decline that led the index to drop around 35% by the end of March. A bloody beginning for 2020, however, has seen a rebound in the stock market as the S&P reached 2950 with a 33% increase.
Is this a shorter-term situation or is it potentially a larger thing that we are looking at? Before we can answer that question, here are a few things to consider:
Unemployment is only growing:
- 30 million people in the United States have filed for unemployment according to the U.S. Bureau of Labor Statistics1
Re-opening the economy could be slow:
- With the country set to reopen, how many people are actually going back to work? With the social distancing measures, large gatherings will be impossible, demand for services will suppressed in major ways, and small businesses could find difficulty staying profitable.
- Furthermore, it is fair to say that the current unemployment benefits, which have added an additional $600 to unemployed workers every week, will discourage going back to work for those receiving them.
- Furloughed workers do not want to go back to work and expose themselves when many of them are making more money through unemployment benefits2
China as an example:
China, who has managed to mitigate the virus and ‘re-open’ its economy has seen little demand as consumers are not spending.
As shown by the graph above obtained from CEIC Data through the Ney York Times3, it is evident that even though factories and production are up and running, retail sales are lagging behind industrial production in China.
Retail Sales at lowest in history:
As of March 2020, retail sales in the United States are down -8.7% equivalent to $483.1 billion according to U.S. Census Bureau4
- Clothing stores = sales dropped 50.5% for the month.
- Furniture store sales = falling 26.8%,
- Auto dealers = down 27.1%.
- Restaurant and bar sales = -26.5%.
*Keep in mind the following numbers are based on surveys conducted by the U.S. Census Bureau and are estimates which contain sampling and nonsampling errors.
Why does that matter? Retail sales are a signal for trends in consumer spending. Consumer spending, as many may know, is the backbone of the American economy as it drives 70% of economic growth in the country5
To put this into perspective, this unprecedented decline in sales far outpaces the previous record decline of -3.9% that occurred in the Great Recession of 2008 as shown by the St. Louis Fed above6.
GDP for Quarter 1 of 2020 dropped -4.8% according to government numbers. What’s worrisome is how much lower GDP could drop in the coming months as economists at JP Morgan Chase forecast a record-shattering shrinkage in the U.S. economy of 40% for the coming quarter.
Resemblance to the Great Depression
While we live in different times, much of what is occurring today resembles the haunting times the U.S. experienced in the Great Depression:
James Bullard, president and CEO of the Federal Reserve Bank of St. Louis said in an interview that he believes unemployment could hit 30% during the second quarter of 2020.
At the height of the Great Depression, unemployment peaked at 25%. As shown in the table created by The Balance, it took 11-13 years for the United States to finally get recover from such unemployment levels.
Economic outlook from the experts:
Downturn will be 4 times worse than the housing crisis, however, it will be followed by an ‘unprecedented come back
Goldman sees a decline of 35% from previous quarter on an annualized basis and the U.S. to see its highest unemployment rate since WWII. Jan Hatzius, chief economist at Goldman, says that the U.S. economy can comeback by recovering at least some of “the lost output with a sharp increase in testing as well as more limited changes to business practices that lower the risk of infection.”7 Hatzius points out that he forecasts 3rd Quarter “growth to be up 19% from the Q2 plunge followed by another 12% jump in the final three months of the year.”
According to Minneapolis Federal Reserve Bank President Neel Kashkari, a lot of people in the U.S. are overly optimistic about a V-shaped comeback and that we are most likely in for a “long, hard road.”
Nicholas Bloom, professor of economics at Stanford Grad School of Business:
“The problem,” Bloom says, “is that the aftershocks of the COVID-19 collapse are likely to last much longest than most people expect.” He warns that it could take up to 5 years before economic output meets February 2020 levels.
Bloom explains that he agrees with the many forecasts that predict the economy will start bouncing back as we reopen as customers could provide demand and businesses will ramp production to meet that demand However, he fears that people should brace for aftershocks as, “businesses are likely to remain cautious for much longer than usual about ambitious new projects. Consumers are likely to be wary, too, especially those who lost a big share of their earnings in 2020.”
“In a baseline scenario—which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound—the global economy is projected to grow by 5.8 percent in 2021 as economic activity normalizes, helped by policy support.”
Gita Gopinath, the IMF’s chief economist warned that this time is different, and “much worse growth outcomes are possible and even likely.”
Manager Director of the IMF proceeded to explain that today, we are confronted with a crisis like no other as they anticipate the worst fallout since the Great Depression. “Just three months ago, we expected positive per capita income growth in over 160 of our member countries in 2020. Today, that number has been turned on its head: we now project that over 170 countries will experience negative per capita income growth this year.”9
Research and analysis show that it is quite possible we are not out of the woods just yet, and many should be prepared for that. The much hoped for V-shape recovery is slowly dissipating as economic data shows that Americans and the economy are suffering at record levels never seen before. No one actually knows where we are headed, but the data shows that we are in it for the long haul and a larger continuation to the downside in the markets is in the horizon.