Despite Shattered Economy, Stocks Rise

The deepest recession “of our lifetimes” could be on the horizon, according to the World Trade Organization; coronavirus has delivered “unprecedented shocks to economies and labor markets,” leading the International Labor Organization (ILO) to declare that we are in “the worst global crisis since the Second World War"; and the Organization for Economic Cooperation and Development (OECD) said its leading indicators, suggested all major economies had plunged into a “sharp slowdown,” which presages “the largest drop on record in most major economies.”

So naturally, stock market indexes were up by more than 12 percent on the week and now up about 20 percent from the March 23rd low. Of course, the stock market is not the economy and there have been many times when investors got ahead of themselves amid a recession. At the end of 2008, many investors thought that the worst was over for stocks, they did not bottom out until March 2009.

That said, early in the week investors were buoyed by the notion that reported new virus cases were leveling off or declining. Then on Thursday, the Federal Reserve announced that it was beefing up its economic rescue efforts by $2.3 trillion and living up to its name as the “Lender of Last Resort.” The actions consist of a $600 billion “Main Street Loan Program,” which will provide four-year loans for small to medium sized businesses at interest rates of 2.5-4 percent; willingness to accept a broader range of securities from banks as collateral; and the willingness to purchase $500 billion of short term state and municipal debt. With these new measures, “the Fed’s balance sheet, which has already ballooned from $4 trillion to $6 trillion, will hit $10 trillion within another couple of months,” says Paul Ashworth, chief economist at Capital Economics.

The Fed’s actions acknowledge that the world and the U.S. are already in a recession and the numbers that will bear that out will emerge over the coming weeks and months. In the three weeks ending April 4th, a staggering 16.8 million Americans filed for unemployment, leading economists to predict that this will be the deepest downturn since the Great Depression, but hopefully, it will be much shorter in duration.

Already, nearly three-quarters (73 percent) of Americans say the coronavirus pandemic has reduced their family’s income, according to a new poll for the Financial Times. “In a sign of how widespread the pandemic’s economic impact has become, almost as many families making more than $100,000 a year reported a hit to their income (71 percent), as those making less than $50,000 (74 percent).”

The OECD said that the pandemic-induced economic slump would persist until there’s more clarity about how long lockdowns will last and how successful they are. Unfortunately, the key to mitigating the disease is for non-essential, human facing businesses to shutter and for most Americans to shelter at home, which is causing the economy to go into a deep freeze.

But before we get back to work too quickly, there’s an economic working paper that’s getting a lot of attention. Researchers, who studied the 1918 flu pandemic, found that tougher measures to curb the spread of the virus could actually help the economy over the long term. “Somewhat surprisingly perhaps, we find that areas that acted early and aggressively with non-pharmaceutical interventions do not perform worse economically, at least in the medium term, if anything, they actually come out of the pandemic stronger,” said Emil Verner, an MIT Sloan assistant professor and co-author of the paper, with Fed economists Sergio Correia and Stephan Luck.

Small Business Update

Nearly a week after the launch of SBA loans for small businesses, I am hearing from enormous numbers of owners who reported frustration, either from the financial institutions or from the SBA itself. Again, part of the problem is that previously, SBA loans amounted to about 60,000 in a given year. As of Wednesday, the SBA said that it has 220,000 approvals. It’s clear that the massive demand means Congress has to get more money into the program, what’s less obvious is whether the additional $250 billion that lawmakers are considering, will be enough.