This week offered the first reprieve of asset price recovery in the current bear market. Swift and significant action by the Federal Reserve enabled the fixed income markets to function as Congress passed the largest stimulus package ever with an estimated $2 trillion price tag. To put the amount in context, it is about 10% of US GDP annually. It buys time by replacing lost incomes as the country chooses to shut-down activity to optimize health outcomes.
As our valiant health care professionals have worked tirelessly to protect our communities, economists and investors have been left guessing as to the magnitude and duration of the impact on financial lives. We are just starting to see the numbers. Claims on unemployment jumped by 3.28 million people this week, about 2% of the total number of employed people in the United States. We believe this number is likely understated since not every person laid off could access the strained system in the wave of activity washing over it.
The current stimulus package was a necessary step, not only to protect those people who have a gap in income but to preserve small businesses so that workers have a job to return to (employers with less than 500 employees account for 46% of US employment according to 2016 Census data). However it is likely a stop-gap measure for the time we are in relative shut-down. Our political research sources have said that discussion is already under way for what level of fiscal support may be appropriate to jump start the economy as we come out of our purposeful stall.
So why did the equity markets rally upon the release of record-setting jobless claims? It’s all about expectations. As we have said before, financial markets look ahead so that current prices imbed an expectation of the future. As bad as the economic indicator was, it generally aligned with what financial markets had come to reflect in price.
This of course is only the first in a string of economic data that will be released in the weeks to come as the picture comes more into focus. This coming week we will see indications across housing, consumer confidence, industrial activity, and, of course, more on employment. Each one will be weighed in the context of market expectations implied by price at the time.
Having seen this data chase happen before, we should expect the financial markets to cycle through bouts of optimism and pessimism. It will be some time before the collection of data points are sufficient to provide a clear picture. Until then, we are prepared for the data chase and market volatility to persist.
It is during times like these that it is important not to “chase” the market. Just like we have seen this past month, a longer review of history suggests that the biggest daily gains and losses often occur close to each other. Staying steady avoids the risk of being whipsawed and allows time horizon to smooth the impact.
There’s a reason we are told from a young age that slow and steady wins the race!
Additional Note: Each community is experiencing the pandemic differently based upon the demographic where the outbreak occurs, the public response to suppress the spread, the healthcare resources available locally, and many other factors. It is a futile exercise to estimate timelines with any precision, but the statistical work we have reviewed places the United States at roughly a week behind Italy in its progression. In the past week, the growth rate of new cases in Italy has plateaued – that is to say the daily new case count has remained flat. While expectations remain for a significant increase in the number of US cases in the near term, there remains a light at the end of the tunnel. In the interim, please work together to stay safe and healthy!
Will Skeean, CFA
Partner – Investment Management Team Chair