The first quarter of 2020 has been surreal in many respects. The Dow, NASDAQ, and S&P all reached historic all-time highs, unemployment numbers were holding steady at near historic lows, job gains were high, and business expansion continued to rise.
Then a global pandemic struck and economies worldwide came to a screeching halt. All three major indexes saw historic losses as the longest-running bull market in U.S. history ended, and unemployment skyrocketed as stay-at-home orders and mandates to practice social distancing shuttered schools, businesses, restaurants, and retail shops across the country.
Relief efforts
For now, all indications suggest that the relief and stimulus packages put into place by Congress and the Fed are working to mitigate the economic fallout from the shutdown. The strong employment numbers we had for much of the quarter makes the unemployment numbers and future estimates all the more staggering. However, enhanced unemployment benefits coupled with the capability of the states to process such a monumental number of unemployment claims confirm the systems put in place are working as intended. Direct payments to Americans have also been authorized and should provide some much-needed relief to those who are out of work or otherwise impacted by the sharp economic decline.
Banks came into this downturn with strong capital levels and the relief programs instituted by the Fed have encouraged banks to keep lending. Credit markets are now cushioned, allowing businesses to obtain loans and funding and providing a necessary bridge to recovery. Finally, the interest rate cuts by the Fed have also encouraged low-cost borrowing for consumers.
Economic outlook
The economic outlook for the second quarter is tempered, with a sharp decline in GDP and other economic indicators expected, but analysts have remained confident that once the COVID-19 outbreak is under control and America gets back to work, the economy will recover quickly.
If we can believe some of the news being reported out of China, the economic data points are encouraging. Like the U.S., China saw millions of workers lose their jobs when quarantine orders were imposed on the country. Although business activity in China hasn’t returned to normal levels, manufacturing has rebounded strongly, with a March PMI number signaling expansion. China is very dependent on overseas demand, so we will be tracking the numbers closely in the second quarter to see the impact on China’s economic growth.
Energy demand dropped sharply as travel restrictions and stay-at-home orders cascaded throughout the world. The price war between Russia and Saudi Arabia continues to complicate matters for the energy sector, and it’s caused the price of oil to drop to 18-year lows. With U.S. suppliers continuing to produce oil, it looks like the U.S. has entered the price war as well. Analysts expect further lows in the near term and caution that depressed oil prices may result in some bankruptcies and consolidation in the sector as we work our way out of the downturn. However, low oil prices coupled with a surplus in supply has resulted in lower gas prices at the pump, with averages less than $2 a gallon. This will help consumers when the quarantine is lifted, and we can get back to driving our cars.
Much of America is working from home, as businesses have been forced to close offices to maintain mandated social distancing protocols. We’re likely to see many employees continue to work from home as they are able to accomplish their work through improved technology. After the health crisis is over, and companies embrace the concept of a mobile workforce, companies may try to cut costs by limiting their commercial real estate corporate footprint. We expect traditional commercial real estate investment trusts (REITs) to struggle as corporate America looks for a new identity.
Innovation and opportunity
While tumultuous times breed uncertainty, it also creates opportunity. Companies that provide telemedicine, videoconferencing and online learning platforms are solving an immediate problem in the marketplace and seeing demand for their products and services increase during this time. Medical innovation is vital to get us through to the other side of this health crisis. As COVID-19 has disrupted our lives and the economy, it’s promising to see companies collaborating to develop treatment protocols and manufacture medical equipment and supplies essential for the treatment of this disease.
Although the ups and downs in the market may create a lot of uncertainty, the stock market is cyclical in nature, and as such, it experiences both high and low volatility on a regular basis. We have to remember that volatility works both ways, but high volatility just doesn’t get much negative attention when it’s associated with market highs. With the stock market still down 20%, investors can use this opportunity to average down on companies that have grown stronger through this downturn.
As always, we appreciate your business and continued confidence in Hoey Investments. Stay safe and healthy.