Financial Forum March 23, 2020 COVID-19 Special EditionSubmitted by Pinnacle Wealth Management Group, Inc on March 23rd, 2020
COVID-19 Special Edition
“Once we have a war there is only one thing to do. It must be won. For defeat brings worse things than any that can ever happen in war.” … Ernest Hemingway
We are at war! Only this time our enemy is not a foreign government or a terrorist cell, but rather a novel virus causing a pandemic that is taking lives and shutting down the global economy. If there was ever a “Black Swan” event, it’s the coronavirus and the simultaneous public health and economic crises it has created. As of Sunday evening, COVID-19 has infected over 335,000 people around the globe, killing 14,611 (4.35% death rate). It has spread to almost 200 countries, creating shortages of test kits, ventilators, masks, etc. In New York City alone, they estimate a shortage of almost 130 million pieces of medical gear. Additionally, hospitals in areas hardest hit with the virus are severely understaffed and underequipped to deal with the wave of ill patients.
On the economic front, actions to slow the global contagion have ranged from country-wide quarantines to a virtual halt/closures of many businesses, entertainment, travel, and schools. As of last Friday, $12 trillion of U.S. stock market wealth has vanished. Equally shocking is the money lost in so-called “safer” asset classes, such as government, municipal, and corporate debt markets. Economists are finally singing a different tune. Up until last week, many of these “fortune tellers” were downplaying the virus’s economic impact and, in many cases, not even calling for a recession. Now they’re expecting significant increases in unemployment claims (could increase by over one million this week) and second quarter GDP dropping anywhere from 8% to 30%. Most companies have or will shortly be pulling their earnings guidance for the year. At the same time, interest rates are close to zero, oil and copper are getting slammed, and we have an upcoming U.S. election.
To deal with the crisis, central banks and governments around the world are opening up their wallets, purses, and anything else that may contain some loose change. In the U.S., the Federal Reserve essentially deployed its entire 2008 crisis playbook in about two weeks. The Fed dropped rates to 0% - 0.25% and said it would begin to buy $700 billion in Treasuries and mortgage securities. It also unveiled various lending facilities to make sure markets had enough liquidity to meet any financial stresses incurred. The President signed a second rescue bill for $100 billion, providing sick leave and free testing. Congress, meanwhile, is working on a trillion-dollar stimulus plan that would include industry bailouts and $500 billion to Americans. The Treasury Department also extended the due date for tax filings to July 15. Many other countries are in the process of taking similar steps. This morning New Zealand announced a nationwide isolation starting within two days.
When Will the Market Bottom?
That is the question we’ve been asked a lot. While no one has a crystal ball and this situation is rapidly changing by the hour, we can look to China and South Korea to maybe glean some answers. In both those countries, stock markets did not stabilize until the virus reached peak transmission and then started to decline. This took about two months. However, we still don’t know if those markets have reached their ultimate bottom. As these countries have tried to return to work and lift travel bans, reinfection rates have begun to rise. This has happened in Hong Kong as a second wave of imported COVID-19 cases have commenced. But there are also other things that we believe need to happen to calm markets. They include:
- Government action
- Oil prices stop falling
- Treasury and corporate bond yields stabilize and then start to rise
This may be the biggest factor of them all. If the Fed has already used its playbook from the 2008 Great Recession, then the federal government needs to bring out the BAZOOKAS and now. For social distancing purposes, businesses and schools have closed, sporting events cancelled, and travel has been mostly grounded – causing economic activity to cease. This in turn has caused mass uncertainty, which has quickly grown to panic in some cases. The government needs to think and spend big. We’re dealing with a massive economic shock and the largest health crisis of our lifetimes. Many health initiatives need to be funded and put on a fast track. Our industrial sector may need to convert some of their factories to produce medical supplies. Laid-off employees, as well as companies in hard hit industries, are going to need assistance. And that’s just the beginning. Depending on the duration of the virus, it may take a series of new stimulus packages before we win this war.
Bottom Line: Only the government has the resources to deal with this crisis and how it acts in the weeks to come will determine if it can provide a floor to the market. At this point, valuations are meaningless.
Oil Prices Stop Falling
Oil has absolutely imploded after Saudi Arabia effectively started a price war with Russia. Add to that the reduced demand from the coronavirus, and oil is getting clobbered on both the supply and demand side. This is a big negative for the economy because the energy industry in the U.S. employs a lot of people, has high capital expenditures, and is very highly dependent on loans. If prices remain low for weeks/months, this will cause energy firms to lay off employees, go bankrupt, and default on loans, which will add more stress to banks.
Treasury and Corporate Bond Yields Start to Rise
If the first three items mentioned above happen (peak transmission, strong government action, and rising oil prices), then bond yields should take care of themselves. If coronavirus transmissions slow then global demand estimates for oil should rise which, in turn, should cause bond yields to rise as global growth and inflation expectations rebound.
Again, no one knows when the market will bottom, or how long or severe this outbreak will last, or what impact it will have on the global economy. But we do believe the items listed above are some of the pertinent areas for investors to focus on. Rest assured, we are monitoring the situation as closely as possible.
All of us at Pinnacle Wealth Management Group, Inc. would like to extend our heartfelt wishes to you and your families. It’s going to be difficult for a while and, at times, success might look like failure, but together we will get through this.
Pinnacle Wealth Management Group, Inc.
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