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Thoughts on the Economy amid Covid-19: Quick Hits


April has truly been a confusing month, and many things seem to be out of place. Though there is a light at the end of this tunnel, we need to understand the worst of this downturn is yet to come.

The reality is still the same:
1) There is no cohesive strategy to combat this virus. The US Government has not responded adequately or responsibly.
2) The virus and death count are still going up at a relatively fast pace. We are not testing enough to understand the path of the virus. 
3) The stimulus package, as predicted, is not enough.  
4) Unemployment applications top 22 million. This spike has overwhelmed state offices with applications for unemployment. Many questions remain.

What Now
The economy is shrinking. Unemployment is rising. The American workforce is roughly 165 million people, and over 22 million have applied for unemployment benefits. The unemployment rate is rising at a pace never seen before. Based off surveys, unemployment is currently believed to be roughly 15%, although some economists would argue it is higher.

The stock market is in a bear market rally: to put it simply, the stock market is increasing in value but it is likely short-term. It is not sustainable. We are still amid a period of intense volatility. In the first 28 days of this cycle, the market dropped roughly 37%. We have gained back about 17% to this point. We have a ways to go to figure out where this will all end up.

The Federal Reserve is buying as many bonds and equity positions as it can. This liquidity support will be huge for the entire market. One of my favorite steps they have taken is short term investing in the municipal bond markets, propping up a market that has maturing debt. This move will blunt the damage already done to municipalities and will inevitably protect investments made by everyday Americans.

What Next
Because of COVID-19, we have seen just how delicate our economy is, how fragile our healthcare system is, how weak some of our larger corporations are, and the list goes on.

Unemployment will climb. I still believe the 18-21% range, or roughly 30-34 million people unemployed, is accurate. Others are predicting much higher because hiring is slowing down dramatically. I may be too optimistic, but the underlying theme is this will continue to get ugly. I should note that independent contractors, gig economy workers, and self-employed do not have straight forward access to benefits yet. That sector is being decimated.

The Stimulus package passed by the US Government was not enough. Every available dollar has been allocated. The funds fell short in supporting a large majority of businesses. The stimulus checks sent to individuals was not enough. Our leaders need to do more to placate this problem. Not only are our businesses closing up shop permanently because the costs to reopen will be too high, but individual Americans have already seen their wallets tighten up because of this mandate and stimulus checks were insufficient. More stimulus is needed.

Commercial Real Estate will take a huge hit. Companies have already begun to see the positives work from home has on their balance sheets, causing them to rethink returning to the space they rent or own. Small businesses and retail shops will not return to full force, thus being forced into breaking leases and ending contracts early. Valuations of property will be inaccurate until we see how the economy opens.

The stock market will continue to be volatile and will retest the bottom. We are seeing low numbers as earnings have started to come out. Right now, CEO’s of companies are frozen as they try to understand what their options are. I personally believe we have not hit the bottom yet, and I am being cautious. As a reminder, the stock market is not the economy. The market is influenced by economy, but it is not a direct influencer of the economy. Some of the best investors are staying in cash right now and slowly tiptoeing in as businesses explore how to open back up. Think of it like this: investors are staying in cash so they have capital ready to dump back into the market when the time is favorable.

I believe that shelter in place is necessary for right now. The medical community is still arguing that this is the best way to halt the spread of the virus, and economists are in agreement that we need to keep the shelter in place until there is adequate testing and an effective vaccine or therapy made available to all. Reopening prematurely risks further spread of the virus and the potential for the healthcare system to be overwhelmed. When the economy reopens, business operations will not return to normal. Consumers have not been spending, and they likely won’t spend at the level they were spending pre-virus. This revenue loss means businesses will not be prepared for the cost of reopening. Economists and business leaders know the only way to reopen is with a cohesive strategy. Without local, national, and global strategies, we risk businesses spending money to reopen with no demand, supply chains still in shock, business partners shut down in other parts of the globe, and many other hinderances.

I am seeing many respond to the pandemic emotionally, and I believe it is important to instead trust the data. I look to a lot of economists, including Justin Wolfers, Betsey Stevenson, Neel Kashkari, and Mariachristina De Nardi, to lay out a path forward for the economy. Right now, they are screaming that we need to heed medical advice, we do not know the path of the virus, and opening up without a solution in place to combat the virus intensifies the problem.

What can you do now
I will always stress the need to cut expenses. We do not know what the future holds. The fact that historically strong companies need government or massive capital intervention to survive should cause us to pause. At any point, you could lose your job, the cost of utilities could change, or the price of food could go up. If just one major factory shuts down or cuts production by even 25% due to the virus (some of them have started) we’ll be faced with a major supply change problem. Cutting expenses now increases our chances of weathering the storm.

Whether you’re unemployed, self-employed, or confident in a job you are still working, it never hurts to talk with an advisor.

Lastly
I have moved to The Morning Brew for my quick hits on news. It is a great resource to keep you informed and highlight what is going on globally, nationally, and in the markets. Here is a referral link below. It is a daily email and is written to be somewhat lighthearted, but I think it is one of the best facts first newsletter. Check it out: https://www.morningbrew.com/daily/r/?kid=113a9f07



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