Time to Read: 6 Minutes
The economic fallout from COVID-19 continues to smash records. Last week, initial claims for unemployment insurance totaled a breathtaking 6.606 million, well above consensus estimates of 4.500 million and just barely below the record-setting 6.867 million claims recorded the week before, as shown below. Over the past four weeks, initial jobless claims have totaled 17.062 million, representing 10.5% of the labor force. As a result, the unemployment rate in April will likely approach 15.0%, an enormous jump from the 4.4% rate reported in March.
Since massive job losses and recessions go hand-in-hand, it is safe to assume we entered into a recession last month. The US is not the only country with a deteriorating economy: the Ned Davis Research Global Recession Probability Model has spiked into the high recession risk range, as illustrated below. The model had moved back into expansion territory only early this year. Movement into the current range indicates a high likelihood that we are in the midst of another global slowdown. Investors shouldn’t be surprised as most nations are enforcing various degrees of lockdown—and it is difficult for economies to expand when people are sheltering in place.
To combat the economic slowdown, the US federal government released a $2+ trillion assistance package to help American families and businesses. The legislation is the biggest economic rescue package in modern American history. “This is a wartime level of investment into our nation,” said Senate Majority Leader Mitch McConnell after Senate Republicans and Democrats agreed to the deal. The package is expected to push the total budget deficit in 2020 beyond $3 trillion.
Equally noteworthy are the massive actions taken by the Federal Reserve (Fed) to help the financial markets. The Fed has slashed interest rates to zero, enacted more quantitative easing and injected trillions into the system. As shown below, the Fed’s balance sheet had already expanded by almost $2 trillion before last week’s announcement of additional actions to provide up to $2.3 trillion in loans to support the economy.
Source: Board of Governors of the Federal Reserve System, as of April 10,2020, https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
During the financial crisis, the Fed’s stimulus and money-printing efforts plugged the hole filled by extensive deleveraging and the evaporation of private credit. This time around, the money will likely make its way into the financial markets. For investors, this creates the potential for inflation and asset bubbles on the other side of the pandemic-induced slowdown.
While we still believe markets will remain volatile as we continue to digest bad news and weak economic numbers in the coming weeks, investors should begin to focus on a strategy for the future while balancing the short-term risks of the economic fallout. We remain slightly underweight equities after adding to some of our underweight positions two weeks ago. We typically don’t think it makes sense to “fight the Fed”—so we remain very focused on our indicators for signs that the time is right to increase our equity exposure.