In a NOLA State of Mind

It just keeps coming 

The layoffs kept coming last week with another 3.8m new jobless claims filed, bringing the total jobs lost close to 30m in less than two months. With unemployment close to 20% (y’all that’s 1 in 5 people…wild), it’s no surprise that consumer spending is plummeting. Consumer spending fell by 7.5% in March (April will be much worse), which, in turn, pushed the savings rate to its highest in 39 years, above 13%. Without strong consumer spending (which is about 2/3 of our GDP), first quarter GDP fell 4.8%, which reflects just two weeks of COVID-19 impacts at the end of March. 

Moral of the story: A fall in GDP to the tune of 25-30% isn’t completely out of the picture for the second quarter if two weeks of mayhem caused a 4.8% decline for the first quarter. One part of GDP that will hold up in the second quarter will be government spending – about $3t worth of it that was deployed in April alone. 

From the Fed 

The market heard two important announcements from the Fed this week. First, the Fed kept interest rates near zero and reiterated it does not plan to increase rates until the economy has come out of this crisis on the other side. Second, the Fed expanded the scope of their lending program – extending it to include more businesses and types of loans – based on input from a survey of individuals, businesses, and nonprofits. Look at such an ancient organization utilizing a modern feedback loop! 

Moral of the story: The size and speed of the Fed’s response to the COVID-19 crisis has been pretty extraordinary, but they are, just like the rest of the world, working with a ton of uncertainty around when new cases will subside and life will return to some sense of normalcy. The Fed is doing everything to provide the economy with a life raft to get through these few months, but more work will be required on the other side as the Fed is tasked with digging us out of a hole with 20%+ unemployment. 

Earnings are here

Earnings continued in full force this week. Companies depending on retail and consumer spending, like Apple, Starbucks, and McDonalds, all took a beating as stores were shut down and discretionary spending took a nosedive. Companies like Google and Microsoft benefitted from the “stay-at-home” economy because of their cloud capabilities. Amazon not only benefited from its cloud business but obviously also from its ecommerce platform. However, the company announced it plans to spend basically all its 2Q profits on addressing COVID-19 like increased testing, safety protocols, and wages for workers. 

Moral of the story: Markets tried to digest the information from earnings releases in addition to loads of economic data and COVID-19 response updates, making for a volatile week. In many ways, the market is assuming that things bottom out in the next few weeks as states begin reopening their economies and we get an idea of what the new normal looks like. But the biggest risk I see right now is that once things start opening up again, cabin fever causes people to be reckless and we see new COVID-19 cases pick right back up. In the meanwhile, the FDA has issued an emergency use authorization for Gilead’s remdesivir for the treatment of COVID-19 in adults and children hospitalized with severe symptoms, so hopefully this helps curb the death count (which now exceeds the number of American casualties experienced in the Vietnam War).