Date : April 20, 2020
Category : In the News
For many, last week’s religious holidays may have felt more protracted than in the past as social distancing and the familiar “stay-at-home” mantra brought new twists with family (still) all under one roof. This week, the markets were back to being open for the full week. Below is a summary of market activity.
Over the course of the week ending Friday, April 17th, U.S. stocks floated between positive and negative territory before ending the week up 3.0%.
At the end of the day on Thursday it looked like stocks were headed for a flat to down week as the impact of the COVID-19 pandemic began to be quantified in economic reports released this week. Retail sales declined 8.7% (seasonally adjusted) in March, the largest drop on record. Baked into this figure was a 50% drop in sales at clothing stores and significant declines in spending on electronics, furniture, sporting goods and motor vehicles. Industrial production dropped 5.4% (seasonally adjusted), the most since 1946. Over the past four weeks, unemployment claims reached 22 million. The International Monetary Fund (IMF) forecasted the global economy will contract by 3% in 2020 with U.S. GDP decreasing 5.9%, more than double the rate of the 2.5% drop recorded in 2009. On the brighter side, the IMF further forecasted a strong global economic rebound in 2021.
Friday brought better news with President Trump’s announcement that the governors of states with limited COVID-19 cases could ease into lifting stay-at-home orders according to a three-phase process called “Opening Up America Again”. Conjecture around potential treatments for COVID-19 also supported markets as the S&P 500 notched it second straight positive week.
On Thursday morning, the Small Business Administration announced that its $350 billion Paycheck Protection Program (PPP) has run out of funds, leaving many small businesses and nonprofits unable to apply for emergency loans that would help maintain their payroll during the ongoing COVID-19 crisis. This news comes after a notice was sent to banks Wednesday night that the program was on the verge of being depleted. Congress is currently wrestling over an interim package that would immediately add another $250 billion to the fund.
There is no getting around the fact that the economy is experiencing a deep contraction this quarter; it’s an event that many economists and experts have expected since the pandemic first swept across the country in March. While some industries (for instance, education and professional services) have been able to function remotely in light of widespread stay-at-home orders, other industries — such as transportation, leisure, and hospitality — have shut down completely, which significantly hampers economic growth.
But there is reason to believe that once the pandemic dissipates, businesses reopen, and more Americans return to their day-to-day routines, the economy will rebound quickly and strongly. DFA independent board director and labor economist Edward Lazear — The Davies Family Professor of Economics at Stanford University and former Chairman of the President’s Council of Economic Advisers — recently offered some perspective on the current economic downturn and explained why our current situation is different from other crises, such as the 2008 financial crisis.
“This is a very different phenomenon,” Lazear said, noting that our current economic downturn is supply-based, as opposed to demand-based, since the COVID-19 pandemic has shut off the supply of business activity and labor to the economy. Supply-based downturns are more “V-shaped,” in that they go down quickly, and come up quickly. “In some sense, I would expect demand to be higher in the future, not lower. The reason for that is because there is a good bit of pent-up demand right now,” Lazear said, citing that many Americans would be actively participating in the economy — for instance, eating out at restaurants or frequenting shops — if not for social-distancing and stay-at-home orders, especially since the economy was on strong footing prior to the pandemic taking place.
Strong prospects for economic recovery don’t change the fact that this downturn will have long-lasting effects. But as Lazear and other economists (such as Federal Reserve Chairman Jerome Powell) have mentioned, the sooner we are able to get the pandemic under control — either by reducing the spread of transmission through continued social distancing or treatments — the sooner the economy will be able to bounce back.
If you would like to discuss further or simply would like to chat, please don’t hesitate to reach out to our team. Wishing everyone a pleasant and safe weekend.
Harris Financial Advisors
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