The Great Shutdown: What Happened and What’s Next
With the spread of the novel coronavirus in the first quarter of 2020, individuals and businesses quickly felt the impact of stay-at-home orders and business closures. The negative economic impact was clearly demonstrated almost immediately with markets experiencing a steep downturn in Q1.
What has been the economic impact of the Great Shutdown?
Employment statistics were especially stark with new claims for unemployment benefits registering in the millions every week starting with the report on March 26. Domestic GDP also reflects the weakening of the U.S. economy with first quarter GDP estimated to have declined five percent while second quarter GDP is currently estimated to register an annualized decline of approximately 40 percent.
How have the markets responded?
In terms of the U.S. equity markets as measured by the Standard & Poor’s 500 Index, they have done very well as this bellwether index has increased 36.6 percent since hitting its low for the year on March 23. International equity markets have also rebounded, but their recovery has not been as strong as the move in U.S. equities. As economic weakness started to become a reality, fixed income markets also performed well as declines in interest rates have driven broad measures of bond returns to levels exceeding five percent year to date.
Why have markets performed better than expected?
The significant performance generated by financial assets over the past couple of months has confounded many investors given the backdrop of an economy that was experiencing precipitous declines across numerous measures of activity. The primary driver of this phenomenon is quite simple and straightforward. It is the extremely powerful combination of massive stimulus provided by an aggressive easing of monetary policy along with numerous programs on the fiscal policy side.
Specific steps taken in terms of monetary policy include:
- Reductions in short term interest rates.
- Additional liquidity provided to add stability to financial markets and bond purchases by monetary officials which have provided liquidity to the markets as well as keeping interest rates low.
- Fiscal policy measures including legislation such as the CARES Act and the Payroll Protection Program, which indicate a commitment from governmental and monetary authorities to revive the economy in as short a time period as possible.
The positive outcome of governmental and monetary authorities’ efforts to revive the economy, and their continued commitment to additional efforts, have led investors to drive stock prices higher. Markets tend to be forward-looking, and it is this mechanism that has led markets higher in the face of overwhelmingly dismal economic data. We are starting to see a shift in some economic data with several signs of improvement in the economy. For example, rail car traffic, hotel occupancy and gasoline purchases have moved off their lowest levels. Air travel is also recovering, as the number of passengers passing through TSA checkpoints is increasing.
The most important variable for maintaining positive economic momentum will be improvements on the employment front, and the May 2020 employment report indicated a rise in employment, which may be an early sign the labor market is on the mend following state and business reopenings.
For now, investors are expressing confidence that improvements will occur particularly when taking into consideration the commitment from government and monetary officials to take whatever steps necessary to ensure recovery.
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The information within this article is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this article are based on the views of BTC Capital Management and on information available at the time this article was prepared. This commentary contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.
*BTC Capital Management is a Registered Investment Adviser and is an affiliate of Bankers Trust Company. This article was created for Bankers Trust Company by BTC Capital Management in its capacity as sub-advisor to Bankers Trust.