Monthly Insights: April 2020

As the novel coronavirus pandemic takes hold on the U.S., new economic data is beginning to show the sheer magnitude of the near-term impact. As utterly astonishing as some of the initial data is, we are prepared for the numbers to look even worse. Much of the data only shows a small early glimpse of the social distancing and stay-at-home orders happening across the country. Data over the next month will paint more of the picture. While the numbers may be striking, they shouldn’t be alarming. 

Unemployment Claims

The first glimpse of economic pain came from the weekly unemployment claims data released on March 26th. A record 3.3 million workers filed for unemployment benefits during the prior week. This is a remarkable number, almost five times the prior record of 695,000 set back in 1982. To give some context to this number, it is equivalent to all of the workers in the entire state of Indiana filing for unemployment at once. As if this wasn’t remarkable enough, the following week 6.6 million more workers filed for unemployment benefits. In total, nearly 10 million workers filed for benefits within a two-week period, roughly equivalent to 6% of all those employed in the U.S.

Unfortunately, there is more to come. We expect initial filing claims to continue as businesses temporarily shutter and millions of workers are furloughed. While large, these numbers have not been unexpected to us. As an example, in spite of the 6.6 million Americans filing for unemployment benefits in the April 2nd report, the S&P 500 closed higher on the day. Let me say that again, even with unemployment claims registering a shockingly high record number, the stock market moved higher on the day. 

How can this be? The stock market decline over the previous month already began pricing in these really bad numbers, and it is just taking time for the economic data to catch up with what we all know is reality. This is not to say markets won’t decline more, they certainly can. However, much of the market risk may derive from the length of our self-imposed economic damage, not the short-term severity, which appears largely priced in. A significant increase in the time it takes to fight the spread of COVID-19 could lead to another leg lower in markets. Most likely, that would also lead to another phase of fiscal stimulus to offset some of the negative economic impact. 

Government Response

In light of what we all know will be a dramatically ugly short-term economic picture while the economy is on pause, the federal government has stepped up in a quick and big way. The Federal Reserve has done everything in its power to loosen financial conditions by lowering interest rates and injecting trillions of dollars into financial markets. They acted swiftly and powerfully in historic fashion.

On the heels of the Fed’s actions, Congress came together to pass the $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The CARES Act provides many Americans with direct cash and many businesses with short-term funds designed to retain workers. 

Together, the government’s monetary and fiscal response may have allowed the U.S. to avert a depression. They have injected trillions of dollars into the U.S. economy in what may ultimately amount to roughly 20-30% of annual GDP. As large as the response has been, government officials continue to state they will act more if there is a need. And while phase three of the fiscal response (the CARES Act) was large, talk about a phase four package began even before the third phase was completed. 

One day the U.S. will have to deal with the bourgeoning debt pile, but for now federal debt is not a major concern. A more difficult situation would be dealing with our current debt load while enduring an economic depression. However, debt throughout the rest of the economy may become a near-term issue as we begin to see who has stretched themselves too far. For anyone wanting to dive deeper into this topic I highly recommend reading the recent white paper by Paul Cantor, CFA, CFP®, AIF®, Allegiant’s Chief Operating Officer, The Debt Albatross

Hit the Pause Button

The economy has not stopped, it is just on pause. This is an important distinction. Monetary and fiscal policy actions taken by the federal government have bought the U.S. time while the economy takes a breather. While the government’s actions are not foolproof (far from it) the trillions of dollars infused into the economy provides needed life support as we heal medically. We don’t know exactly when business activity will resume, but the government is taking historic measures to increase the chances that the economy quickly returns to normal once the outbreak is controlled. 

Benefit to Long-Term Investors

A few weeks ago, I wrote a Features article comparing the market declines today to the declines in 2008. Luke Nicholas, CFA, CFP®, Allegiant’s Director of Portfolio Management, wrote a follow-up Features article examining the other instances of 30%+ declines in the stock market and future returns. While the bottom may not be set, history shows long-term investors are rewarded for purchasing equities after such deep declines in the stock market, even though markets may move lower in the short-term.

The decisions investors make during heightened volatility have a magnified impact. As hard as it may be to watch markets decline, following portfolio management best practices like rebalancing can have an outsized positive impact on investors’ long-term results. Controlling emotions is key here, as is keeping a focus on the long term as well. Remember, short-term volatility is the price you pay for long-term investment success

Allegiant is currently making proactive decisions in your portfolios to capture long-term opportunities that will help drive your financial success. We understand the stress and emotional heartache present during times like this and we will continue to reach out to each of you. 

We have also heard from clients seeking our help with friends and family during this time. As the Allegiant team ramps up our efforts with each individual client, we can only hold open limited spaces for new clients. We understand the need and would like to help where we can. If you have someone you would like us to help, we will make every effort to provide them with the same level of service and fiduciary stewardship that you have become accustomed to from our knowledgeable and caring team.

If you would like to see more data and charts about the economy and various financial markets, please click here to view Monthly Insights book.

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Benjamin W. Jones, CFP®, AIF®
President, Chief Investment Officer, Principal