From Bear to Bull in a Week
Another wild week. The sharpest, fastest bear market in history – the S&P 500 was down -35.2% from its closing high on February 19 to the intraday low on Monday – was followed by the sharpest, fastest move back into bull market territory in history, as the index rallied +20% from that point through yesterday’s close. Both Tuesday and the past three days were the best for the Dow in 87 years. Now I can say I’ve seen seven decades in my lifetime – the 1970s, 1980s, 1990s, 2000s, 2010s, 2020s, and March.
But bigger picture, in a way this week marked a transition from stage 2 to stage 3 of this crisis. Namely:
1) Stage one was the shock of an out-of-control virus spreading around the globe.
2) Stage two was the massive policy response, which came to a head this week with moves by both the Fed and Congress.
3) We now seem to be moving into digesting the economic fallout. How bad will the slump be and are we looking at a V, U, or W type recovery scenario.
This isn’t to say that stages 1 and 2 are complete, only that the markets are moving from digesting and pricing in each in turn. Let’s dig into numbers 2 and 3 a little deeper.
Now That’s A Pile of Money
A trillion dollars. What does that even really mean? How do you get your head around that number? Well, let’s try this. Think of $1million in $100 dollar bills. Stack them up and they reach a high of 40 inches (that’s kind of a letdown really). Now a billion would bring the pile up to 40,000 inches (that’s 0.63 miles high: much more impressive!). A trillion = 40,000,000 inches high, which is 631 miles. Now we are talking!!
Well the fiscal package passed by the Senate and House this week and soon to be signed by President Trump spends a touch over $2 trillion. Main pieces of the legislation include:
– $350bn in support for small businesses in the form of loans that will be forgiven if the business retains and pays workers, pays rent, etc. Apparently this will be administered by the SBA. This could create some administrative complications as SBA has fewer than 4,000 employees.
– $300bn of direct payments to middle- and lower-income Americans of $1200 per adult and $500 per child.
– $260bn for an added four months of unemployment benefits.
– $340bn in support for states and localities.
– Then there is $425bn the Treasury would get to partner with the Fed to lend to businesses and state and local governments. With Fed leverage this could amount to around $4 trillion in lending. It appears the Fed is ready to go on this, they even have a name: the Main Street Business Lending Program.
You can see how it all breaks down in the graphic below.
Obviously, this is a big program. To put it in context Goldman noted the following:
“…we expect economic output to decline by roughly $700bn in 2020 from the 2019 level…While not all of the provisions in the legislation will directly offset lost income, the size and scope of the legislation is on par with the immediate economic effects of the virus, and most of it is going to affected businesses, workers, municipal governments, and the health care sector.”
And this may not be all if the economy remains on lock down beyond April. Politico yesterday reported:
“Speaker Nancy Pelosi is already looking ahead to Phase 4…Some of the things Democrats are pushing for include additional funding for state and local governments to address the rapidly spreading virus; expanding the pool of people who qualify for family and medical leave; more federal dollars for food aid; stronger worker protections for first responders; funding to offset coronavirus treatment costs; and stabilizing pensions.”
QE 1, 2, 3…..to infinity
If Congress is wheeling out the fiscal bazooka, the Fed is firing a monetary one. On Monday the Fed announced a wide range of new measures:
– Buying a potentially uncapped amount of Treasury securities and agency mortgage-backed securities. So called QE infinity.
– They also set up a program to support new bond and loan issuance through direct loans. This program will be open to investment grade companies, providing bridge financing of four years. Borrowers may defer interest and principal payments during the first six months of the loan.
– They set up a program to support the secondary markets to provide liquidity for outstanding corporate bonds. As part of this they also said they will buy corporate exchange traded funds (first time they have ever done this).
– They restated a program from the financial crisis called the Term Asset-Backed Securities Loan Facility (TALF). This supports the issuance of bonds backed by things like credit card receivables and car loans.
– They also expanded the program to support money market funds.
– And as previously noted they launched the “Main Street Business Lending Program” to support lending to eligible small-and-medium sized businesses.
Any way you cut it this is a big deal. The fed is basically acting as a lender of last resort, not just for banks (their typical mandate), but corporate America.
And the Fed isn’t wasting any time. By Thursday the Fed’s balance sheet surpassed $5tn, as you can see below. It was up roughly $750bn week-to-date through Thursday. I haven’t seen Friday’s numbers yet, but you can bet it will even higher.
Stage 3 – Gauging The Economic Fallout
Of course, all this firepower is being thrown at the economy because it came to a sudden stop in March. And none of this can solve the virus problem. So, investor’s attention is now turning to stage 3 of this crisis – just how bad will the economic fallout be?
The only hard data we’ve seen so far was Thursday’s weekly jobless claims number. And like much we’ve seen of late, the number was off the charts, as you can see below. 3,283,000 people filed initial unemployment claims for the week ending March 21st.
To look at it another way, Bank Credit Analyst estimates that the unemployment rate would be close to 6% based on this number. It is assuredly going higher.
As you can see below, Norway’s unemployment rate is already over 10% after starting at just 2.3%.
From a market perspective some of this bad economic news is already discounted. Everyone knows the data is going to stink over the next two-to-three months. No shock there. But what are we looking at beyond that? Can the new fiscal spending plug the hole from people not working and businesses being closed? How much will it fall short? We are all wrestling with three possible future scenarios:
1) A-V shaped recovery where the economy goes down hard and bounces just as hard due in part to all the stimulus we are throwing at the problem.
2) A-U shaped recovery where the bounce is more muted as workers possibly go back to work in phases and the economy struggles with the fallout from bankruptcies, etc.
3) Or possibly a W-shaped recovery. A sharp stimulus fueled bounce followed by a relapse either because of fundamental economic damage (that we don’t see yet) or the virus returns in the winter.
There are no easy answers yet. Much will depend on the trajectory of infection rates around the world over the next few weeks.
Charts We Are Watching
In this section we are simply highlighting interesting charts we came across during the week.
– It was disappointing to see the number of new cases in Italy tick higher yesterday.
– Negative rates come to the U.S., at least at the 3-month part of the curve
– Virus testing is finally ramping up, but was it ever slow to get moving.
– This shows the dramatic drop-off in hourly workers going into work.
– Some companies are hiring during this slump.
– Insider stock buying is flashing a contrary signal.
Have a good weekend.
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