Markets are anxiously awaiting news from the Trump administration around how the president plans to reopen parts of the country now that the US is likely nearing the peak in new coronavirus cases – at least for the first wave.
Trump claims to be “finalizing guidelines” for states which he says will be unveiled at some point on Thursday. To say local officials are skeptical would be an understatement. Trump backtracked this week on claims to having “absolute” authority on directing states’ reopening plans, likely because he realized that sticking to that declaration meant taking responsibility if something goes awry, which it almost invariably will somewhere.
Additionally, it’s hardly clear that citizens are going to follow the guidelines, especially if they contradict state directives. Businesses are, of course, clamoring to reopen – but not necessarily because they believe the threat has passed. Rather, because they are facing a liquidity crisis which, even for previously healthy firms, may morph into an insolvency issue by the end of next month.
(Deutsche Bank)
Equities are obviously impossible to price at this juncture. We’ve seen JPMorgan, Citi and Bank of America set aside billions for likely defaults and missed payments, while Goldman took a big hit on credit exposure in its lending arm. The second quarter is going to bad and as Q1 earnings come in, we’ll get a preview of that, extrapolated from trends management saw in March and also courtesy of guidance from firms that haven’t yet withdrawn or altered their outlook.
Some market observers are pleading with investors not to trade solely based on “beats” or “misses” in the data.
“Whether retail sales, manufacturing data or jobless claims beat or miss relative to expectations is a distraction. It’s not the core argument in markets”, Bloomberg’s Mark Cudmore (a Lehman veteran) wrote Thursday. “Bulls and bears are roughly aligned that the power of the economic shock is unprecedented [so] no matter how dramatically negative the prints, they aren’t a solid reason in isolation to sell”.
Suffice to say nobody was listening on Wednesday, and folks’ mettle will be tested anew on Thursday and pretty much every day from here through the summer.
“Weak economic data being churned out from the US and the IMF’s sobering assessment have helped to curb the market’s risk appetite, despite COVID-19 news-flow generally improving globally, and steps taken by governments to gradually emerge from lock-downs”, SocGen’s Jason Daw remarked today. “Post the panic phase of last month, sobering economic realities are increasingly driving the moves in asset prices”.
There are arguments on both sides – looking through the data is both rational and irrational all at once. It is an engineered collapse, but using the term “engineered” seems to gloss over the fact that had nations not undergone lockdowns, we’d have likely seen a collapse anyway once businesses voluntarily closed as the virus spread unchecked, sickening workers and keeping customers away. Additionally, stimulus can simulate economic activity in terms of injecting cash both into businesses and the bank accounts of citizens, but we do need the output, after all. There has to be something to buy.
The dollar is on the front foot again and that’s a potential problem. The IMF is set to provide liquidity to countries not eligible for the Fed’s various programs, which will help, but as we’re seeing in Turkey (more later) strains are evident.
“The real crux of the argument is how long the economic pain will last and whether the secondary impacts, such as on unemployment and consumption, are mitigated by policy support”, Bloomberg’s Cudmore went on to say Thursday. “That’s an obvious simplification but you get the point: everyone knows unemployment is sky-rocketing and retail sales are plummeting”, he added.
Deaths continue to be a macabre lagging indicator in the struggle to assess the state of play around the virus. There’s not much in the way of “forward guidance” to be derived from looking at the trends in fatalities – not for the living, and certainly not for those included in the count.
(Deutsche Bank)
Comparing statements from, on one hand, Trump and the GOP, and health experts on the other, always offers an amusing juxtaposition.
“It is time for Texans to go back to work”, Ted Cruz declared, on Wednesday.
“The battle continues, but the data suggests that nationwide we have passed the peak on new cases”, Trump said.
Standing next to the president, Deborah Birx noted that the US is, in fact, “improving” both at the national level and at the local level. But she struck a cautious tone and lapsed into colloquialisms, perhaps hoping to get through to a public (and a president) that doesn’t generally listen to scientific arguments.
“To all of you that are out there that would like to join together and just have that dinner party for 20, don’t do it”, she pleaded.
The two countries that relaxed lockdowns and shelter-in-place orders (China and South Korea) and the one country that never imposed them (Sweden) are seeing deaths ticking up. Not good.
This is when a strong leader with a vision for health, wealth, academics, economy, infrastructure, scientific advancement, how US interacts with the rest of the world, etc. could take our country to an even better place. I do not mean that this should all be the role of the government nor do I mean Trump, Biden or Hilarie Clinton. We have a real void of true leadership in this country, which is going to hurt the US more than anything else.
We most certainly have a void of leadership at the top. I’m not convinced Biden will solve everything but he may just let people who know what they are doing try. It seems right now everything has to pass the Trump vanity test, even stimulus checks were delayed for his “signature” in the memo field.
I don’t believe Cruz is a Texan. He needs to provide his birth certificate. Running against Beto just barely worked for him. The extent of the risk should be drving the return to work not soft handed blow-hards.
Hell. and I am back to work anyway, as is my wife.
Your thought about “it’s hardly clear that citizens are going to follow the guidelines, especially if they contradict state directives.” to me is spot on – the resumption of cases in Singapore – read the https://www.thestar.com.my/news/regional/2020/04/15/experts-warn-of-further-restrictions-in-singapore-until-covid-19-vaccine-is-ready
This a mess and the impact on the market will be challenging – the seats are being pulled away and more and more will be left standing
Stay safe
Realistically, economies will start being “reopened” sector by sector and state by state, beginning probably in a month, regardless of the view of health experts.
The financial pressure is too great to do otherwise, the Administration is unwilling to or incapable of protecting most Americans from that pressure, and other countries are going to be re-opening.
Whether the re-opened businesses will find customers returning depends on type of business and location.
A small town diner will see business recover quickly to whatever level the local economy can now support, because much of the customers think the whole thing was overblown anyway. A hairdresser / nail salon will see a similar quick recovery, because hair, coloring, and nails are high priorities for the customers. A movie theater will see business come back quickly, because people want to escape from reality and movie night is a fairly inexpensive way to do it. In areas that have been hard-hit by Covid, consumers may be more cautious. Businesses that can implement social distancing precautions will do better, businesses that serve mostly younger people will do better. Yes, 30-40MM Americans have lost all or most of their income, but the rest are probably sick of SIP and ready to go out and consume things.
In general, “small ticket” purchases will bounce back faster than “big ticket” purchases that require credit, income security, and optimism. We saw this in 2009, sales of sweaters picked up faster than sales of cars and boats and houses.
Above refers to consumer-facing businesses. Other types of businesses have a more complicated road. Inventories of many goods are probably pretty full, capital spending plans are uncertain, business formation is probably pretty much stalled.
The interesting thing is that, looking across the investment landscape, the stocks that have been hardest hit are generally the ones most exposed to the consumer. Typically smaller cap as well.
Of course, the fly (or bucket of maggots) in the ointment is that the virus is still out there. Herd immunity is a fantasy, my back of envelope modeling suggests that in my state (Oregon) maybe 2-3% of the population has had Covid. It will be higher in the worst-hit areas, might be 30% in NYC. Nowhere is it likely to be near herd immunity levels. Antibody testing is also a fantasy, the tests available not have significant false positive rates (up to 10%) and if you are testing for something which only exists in 3% or even 10% of the population, that sort of false positive rate makes the test results pretty meaningless. Medical capacity has been expanded in some areas, but overall only modestly – there might be 10% more ICU beds and ventilators in the US versus what there were two months ago.
Absent a helpful mutation, or a seasonal effect not yet seen in warm-weather countries, it is hard to see how widespread reopening doesn’t lead to widespread reacceleration of Covid, after a few weeks’ lag.
So do we see the economy being reopening in a stuttering on-and-off again manner, or do we simply let ‘er rip and damn the corpses?