Winter is Coming

What happened this week 

Market volatility continued for the large part this week after the Fed cut interest rates to basically zero on Sunday and launched a $700 billion quantitative easing program. Here’s the breakdown of the week’s main events – 

Monday: Stocks fell precipitously at the beginning of trading and triggered the circuit breakers again. Government-mandated shutdowns were announced in NY, NJ, CT, and San Fran. The US airlines asked for over $50 billion in government aid. Canada closed it borders to non-citizens. US cases were at 4,643 and deaths were at 85. Stocks closed down 12% in the third worst day ever. 

Tuesday: The Fed launched a short-term funding program for businesses. The EU closed its borders. The Trump administration spoke of its $1 trillion stimulus plan.  Joe Biden won some key primaries. US cases were at 6,420 and deaths were at 108. Stocks rebounded slightly after the bloodbath the day before, closing up 6%. 

Wednesday: Stocks fell again and triggered the circuit breakers midday. Oil fell 24% in its 3rd worst day ever and prices fell to an 18-year low. Trump signed a $100b coronavirus aid package to support emergency paid leave for workers and free testing. US cases were at 7,782 and deaths were at 118. Stocks closed down 5%. This marked the 8th consecutive day stocks swung 4% or more in either direction, topping the previous record of 6 days in 1929. 

Thursday: The impact on the US labor market came through in the first spike in weekly jobless claims. Italy’s death toll surpassed China’s. Tulsi Gabbard dropped out of the Democratic race. US cases were at 13,676 and deaths were at 200. Cali issued a statewide “stay at home” policy. Stocks closed basically flat for the day. 

Friday: NY Governor ordered 100% of non-essential businesses to work from home. The UK went into lockdown. US cases were at 19,099 and deaths were at 244. Stocks closed down 4% for the day and closed the week down in the worst week since the GFC in 2008. TGIF

Moral of the story: Investors have never really had to deal with something like this, so we have no idea how to identify the point at which the impact of COVID-19 has been appropriately priced into the stock market. A firm fiscal plan to backstop the economic damage could also calm the market. The latest here – a stimulus package is being worked in the Senate that would total more than $2 trillion, which is ~10% of the US economic output. 

When we stop going out 

The economic data impacted by COVID-19 is starting to trickle through. Retail sales dropped 0.5% in February, which is the largest drop we’ve seen in a year. Sales were 3% lower at gas stations (oil prices were dropping already in February, and this is before the Saudi Arabia and Russia price war that started last weekend and sent oil prices into plunging into the depths of despair), only 0.5% lower at bar and restaurants (obviously this is going to get obliterated in March with many government-mandated shut downs or take-out only situations). Internet retailers, as expected, saw a solid increase in sales, and I’d expect this trend to continue. 

Moral of the story: This 0.5% retail sales decrease in February is going to look like a rounding error compared to what what’s coming. The last week in February was the first community-transmission of COVID-19 in Cali so put that into perspective with the situation today where many parts of the economy coming to screeching halt today. March economic data is going to be U-G-L-Y (I’m spelling it out so the kids don’t understand the scary thing we’re talking about). 

The beginning of the end

The weak retail sales figures are going to directly correlate with the employment situation – last week’s jobless claims already spiked 70k, and that was before entire states started mandating non-essential businesses to shut down, which means that entire industries are currently making little to no money – retail, food & beverage, gyms, salons, hotel & leisure, travel, etc. – and the layoffs are coming (*insert winter is coming GoT meme*). 

Moral of the story: Remember how the strong consumer in this country was keeping the economy chugging along? Yeah that’s in the past now. Even after the government mandated shutdowns pass, it will take some time before consumers are comfortable being back in local restaurants sitting arms-length (if that much) away from the stranger at the next table. Consequently, it’ll take time for a lot of these businesses to get back to the same sales productivity levels they saw before all this started, which means it’s going to take a while for all those who will lose their jobs to find a way back into employment. The more I think about this, the longer it seems the recovery will take.