Adjusting to Seismic Shifts

In the blink of an eye the coronavirus has fundamentally changed our world in more ways than we can imagine.  While it seems like an eternity ago, it only has been a matter of days since Pennsylvania Governor Tom Wolf issued his first stay-at-home order for a few counties in the state.

This week, the Governor expanded his order to all counties throughout the Commonwealth and for a period of at least 30 days.  In recent weeks, many states have enacted their own stay-at-home measures being it necessary to mitigate the spread of the COVID-19 virus.  Unprecedented times call for unprecedented measures.

It is needless to say that from a financial perspective, social distancing and self-isolation have created a seismic shift in the economy, in financial markets and in many people’s personal financial plans.  Data this week showed that over 6 million people applied for unemployment benefits adding to last week’s catastrophic 3.2 million initial jobless claims.

Figure 1: A 50-fold increase in jobless claims

Source: Broadview Macro Research

And to put this number into perspective, the 4-week average just prior to the virus outbreak was sitting at around 200,000 initial claims. That’s a fifty-fold increase in less than two weeks and at no time in post-war history have we seen so many people lose their jobs in such short order.

And so it goes: most people today know someone that has been fundamentally affected – whether it’s in their physical or mental health, finances or otherwise – by the coronavirus outbreak.  Without a doubt the unexpected event has fundamentally changed the plans that nearly every single American has laid out for themselves this year and for years to come.

While a number of measures are underway to mitigate the financial fallout from the pandemic, many households and business owners are still struggling to grasp the gravity of the changes underway.  With that said, during this time of change, we believe that the best way to rebound from a financial setback is by setting yourself up with a plan to navigate a world that has just gone through a seismic shift.

Government loosens its purse strings

So, what exactly has the government done to address the economic and financial fallout from social distancing measures?  Well, in response to and anticipation of further virus mitigation efforts, the government has taken unprecedent actions to shore up the economy.  For instance, on March 27, Congress passed the Coronavirus Aid, Relief, and Economic Security (or CARES) Act.  This fiscal stimulus package provides more than $2 trillion in aid to individuals and businesses of all sizes and across the United States.

Such a dollar amount is certainly hard to grasp on its own, but in comparison to past stimulus measures, the CARES package is more than twice the size of the American Recovery and Reinvestment Act passed during the Obama administration back in 2009.  In terms of what went into the CARES package, there are a number of items geared to help households and businesses.  These measures include:

  • A one-time cash payment to taxpaying households
  • Allowances for certain tax-free withdrawals from retirement savings accounts
  • Exclusion of payments for certain federally subsidized student loans
  • Increases in unemployment insurance benefits
  • A delay of employer payroll taxes and taxes paid by certain corporations and;
  • Other changes to the tax treatment of business income and net operating losses

Figure 2: The government will borrow $2 trillion to support households and businesses

Source: Broadview Macro Research

Overall, about a quarter of the money from this package will go directly to households, 40% will go to help businesses and roughly a third of the money will go to state and local governments and health and education institutions.

Fed pulls out all the stops

Now on the monetary side, the Federal Reserve has pulled out all the stops to support the proper functioning of the financial system and carry out its dual mandate of price stability and full employment.  Put a different way, the Fed today is doing everything it can to support the financial system (and the economy) like it did back in 2008. In reality, under Jay Powell, the Fed is doing much more than it did a decade ago when Ben Bernanke was at the helm.

To this point, early last year the Fed signaled that it would stop raising interest rates, and pivot away from tightening monetary policy and toward easing as economic growth back then started to show signs of fraying.   What’s more, in September, the Federal Reserve restarted its asset purchase program after certain events exposed issues in the Treasury market.  At that time, the central bank had begun purchasing assets at a rate of $10-20 billion per month.

In March of this year, the Federal Open Market Committee (FOMC) surprised markets when it cut its target policy rate to around zero percent.  What this means is that the Federal Reserve wants interest rates to go back to the same level that they were during the height of the Global Financial Crisis a decade ago.

Figure 3: Fed Assets Up Over $2 Trillion in Less Than 7 Months

Source: Broadview Macro Research

Also last month, the Fed committed to purchasing corporate and local government debt, it increased the rate of its asset purchases up to $90 billion per day and committed to adding an unlimited amount of assets to its balance sheet for an indefinite period of time.  Taken together, the actions from the Fed signal a willingness to get ahead of what is likely to be a very serious downturn in the U.S. economy.

A “V” shaped recovery not likely in the cards

So how do these measures relate to economic expectations?  Well, a national poll released on Friday showed that less than half of respondents surveyed believe that the economy will return to normal by the month of June. What this suggests is that the majority of a sample of the American population do not believe that the economy will recover quickly and that the effects of the coronavirus will linger for longer than many policymakers are communicating to the public.

To be sure, we’ve been writing about the fact that global pandemics historically have come in three waves, each with their own recovery period. And so how does this apply today? Well, not only are we right now dealing with the first phase of the outbreak here in the U.S., there are now signs that the outbreak has returned to Asia where – until recently – many countries had thought they contained the coronavirus.

What this means is that social distancing measures in the U.S. are likely to remain in place for longer than most people expect.  This also means that businesses may not reopen as quickly as some people anticipate and it means that more workers will likely remain unemployed for longer.

Figure 4: “V” Shaped Recoveries Tend to be Shorter Than “U” Shaped Recoveries

Source: Broadview Macro Research

From this perspective, it’s possible that the U.S. and global economy will experience a prolonged “U” shaped rebound and not a “V” shaped recovery as hoped by many economy watchers.  Indeed, this view is held by researchers at PIMCO, a widely known asset management firm, who estimate that stability in economic growth could take as long as 12 months to form.

We believe that the reason it could take longer for the economy to recover is because the virus will take longer to contain. And, until a vaccine or significant level of immunity is developed across the global population, the deadly effects of the virus will continue to hamper economic growth.  The result is that many firms will simply not be able to restart operations as quickly as some people had hoped.

Adding insult to injury, we have yet to see whether the current fiscal and monetary support packages will be enough to mitigate a broad swath of corporate bond defaults that are now waiting in the wings.  To be clear, there is a group of companies that for years have been sitting on the cusp of bankruptcy, if not for the support of the Fed’s money printing operations.

Figure 5: More than 50% of Investment Grade Debt is One Notch Above Junk

Source: Broadview Macro Research

What this means is that, in addition to the COVID-19 related risks, the economy and financial markets could get yet another shock from a backlog of ailing companies now filing for bankruptcy protection.  In such a scenario, it’s hard for us to see how household spending and business investment could rebound in short order without a sudden drop in new coronavirus cases globally.

“Nimble thought can jump both sea and land.”
William Shakespeare

Setting up for a rebound

In terms of how we should be relating to these financially important events, it’s our belief that people should look for the silver linings whenever possible.  Without a doubt the spread of the coronavirus has derailed life and financial plans for many people.  While the devastation is unique and personal to each one of us, it is also worth noting that the current events provide a unique opportunity to stop and reassess.  That is, to take a hard look at what’s really important in each one of our lives.

Illness has a way of naturally slowing us down and forcing us to reevaluate our current life priorities.  Sometimes we get so fixated on a goal, or an outcome in our lives, that we lose sight of the really important things that are going on around us. And from a financial perspective, what may have been a priority or an important goal just a few weeks ago may no longer matter as much in light of the current circumstance.  In other ways, the current developments may have taken away people and opportunities that have left us feeling lost and disorientated.

“…in life it doesn’t matter what happened to you or where you came from. It matters what you do with what happens and what you’ve been given.”

Ryan Holiday

In his book, “The Obstacle is the Way”, author Ryan Holiday tells us that, “…in life it doesn’t matter what happened to you or where you came from.  It matters what you do with what happens and what you’ve been given.” From this perspective, we believe that the best way to rebound from a financial setback is by setting yourself up with a plan to navigate a world that has just gone through a seismic shift.

A Dutch proverb tells us that “he who is outside his door already has a hard part of his journey behind him.”  Therefore, whatever the case may be regarding our financial circumstances, one of the most important things that we can do in the coming weeks and months is to simply do something about our financial circumstances.

This can begin by simply reprioritizing expenses to shore up emergency cash reserves to holistically reevaluating financial priorities, taking stock of resources and developing a plan to align financial resources with a new set of life goals.  Whatever the case may be, we believe that one key to getting ahead in life financially in the coming weeks, months and years is to take action today.