After a string of volatile weeks during which the markets dropped, this week provided positive gains across the majority of investment categories. Large cap stocks rose three out of the four trading sessions and racked up 12% gains. Since the current intra-year low on March 23rd, the S&P 500 is up 25%, the small cap Russell 2000 is up +24.5%, and international stocks are up +19%. Fixed income markets have also fared well during this period, with the Barclays Agg realizing a gain of 3% since March 23rd.
The two developments that had the most significant impact on the markets during this shortened trading week were new programs from the Federal Reserve and an apparent flattening of the Coronavirus curve in many hotspots, which led officials to begin discussing when to consider opening up the economy.
In this piece, we take a closer look at these developments as well as the Labor Department’s latest report on jobless claims. The second half of this communication includes thoughts about longer-term implications the pandemic may have on globalization.
Federal Reserve
The Federal Reserve announced new efforts on Thursday to bolster the U.S. economy that propelled markets higher. The U.S. central bank stated that it would purchase small business loans through the Paycheck Protection Program (PPP) and Main Street Lending Program (MSLP) loans as well as expand existing Fed facilities in size and scope. It also officially announced that facilities will purchase short-term municipal bonds and higher quality “junk bonds” in order to provide liquidity to companies rated at least BB- (i.e., upper junk). Through these measures, Chairman Powell and the Federal Open Market Committee (FOMC) reinforced their commitment to helping the economy.
Jobless Claims
The Labor Department reported that a staggering 6.61 million number of new initial jobless claims were filed this week, which brings the total number of people who have filed for unemployment in the past three weeks to 16 million and the unemployment rate to 10%. This report was mixed as the change was an incremental decrease from prior weeks, but still much too high from a humanitarian perspective.
Perhaps surprisingly to some, the markets reacted positively to this report and continued to climb. The explanation lies in the details behind Wall Street’s expectations and the fiscal stimulus.
First, the markets largely anticipated another round of large unemployment claims, and yesterday’s report was both down slightly from the prior week’s (6.65 million claims on 4/3) and less than had been expected.
Second, fiscal stimulus is providing a cushion for the decline. Under the recently passed CARES Act, individuals earning under $100k will receive direct cash payouts, and their unemployment benefits have been expanded and significantly enhanced (e.g., CARES Act expanded benefits to 39 weeks from 26, and added $600/week for unemployment benefits).
Flattening of the Curve
The rate of infection in many of the current hotspots seems to be slowing down, and U.S. infectious disease expert Dr. Fauci struck a more optimistic tone in a recent interview when he said that previous death-rate models likely overestimated the actual death count in the U.S. and that we will likely begin to see improvements in the pace of deaths next week. Fauci also spoke positively about the likelihood that schools would be able to reopen in the fall. Finally, the White House has begun “intensive discussions” about reopening some parts of the U.S. economy by early May.
China is now in recovery mode and has started to get its economy back on track, while Italy, Austria, and Denmark are preparing gradually to reopen. The U.S. still has ground to cover, but the paths these countries follow may provide a useful guide.
Looking Ahead: Thoughts on Globalization
One of the key themes that we have stressed over the last month is the value of looking beyond the current crisis. We have mentioned looking ahead frequently in connection with financial markets, which tend to look through the present moment to what the economy will look like on the other side (and so how the price of securities may respond accordingly). We are also thinking about what the world will look like more generally on the other side of this health pandemic and the government-induced abrupt economic cessation. One question on our minds is, what direction is globalization going?
The picture is not altogether clear. Two competing theories are that (1) globalization as we know it will be a victim of the COVID-19 pandemic and (2) globalization may rebound strongly as a result of the pandemic.
In favor of the first view, that globalization as we know it will be a casualty of COVID-19, is the fact that many companies are realizing that their supply chains have become too complex over the last decade as they have relied on the availability and swift transport of goods from wherever they could be sourced. This also applies to manufacturing and production. It is perhaps likely that companies will begin to focus onshore and build redundancies within their supply chains and production facilities to weather a future crisis or disruption. Even after the stay-at-home restrictions are lifted, it is likely that in the short- to medium-term, some travel restrictions may linger along with a wariness to travel for business or pleasure. If so, then such restrictions on global movement will hurt many of the countries that benefit from trade and tourism for some unspecified period.
Another view, that globalization may grow as a result of the pandemic, observes how global central banks and health professionals are communicating and coordinating through this health crisis. This view sees how no country’s economy has been spared adverse growth effects due to lockdowns and virus transmission mitigation measures. Increasing protectionism and trade wars, not only between geopolitical adversaries but also allies, characterized the years leading up to the COVID-19 pandemic. All countries will be interested in accelerating as much as possible trade, revenue, and balance sheet repair. Global trade protectionism slowed economic growth, created worries about policy blowback, and hindered the advance of financial markets, particularly in 2018. When those worries began to ease in 2019, global equity markets rebounded sharply. So from this view, globalization may actually make something of a comeback, trade protectionism may give way to trade agreements, and governments may continue to engage other countries as they have at various levels throughout the crisis in order to jumpstart and sustain economic recovery.
These two views are not necessarily mutually exclusive. There may be some pulling back from globalization in terms of supply chains and manufacturing alongside an increase in government coordination and a decrease in protectionism. Which view or mixture of views will come to fruition remains uncertain. As we look ahead, however, beyond the crisis, the question of where globalization is heading will be important from an economic, investment, social, and political perspective. We will continue to study the issue and how it may impact clients’ portfolios.
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