The US lost 701,000 jobs in March after 108 months of consecutive gains, a record more than double the previous high of 48 months set in the early ’90s. Worse, this number does not reflect the almost 10 million unemployment claims filed over the previous two weeks. Estimates, if you can call them that, are for next month’s job losses to exceed 24 million. The US economy has never experienced such a sudden and extended drop in economic activity on such a wide scale. Of course, it is not just individual countries being affected in isolation. World trade, by volume, was off by 20% in February and almost 70% in March. A fall-off in commerce of this scale, even over a multi-year period, would indicate a severe contraction in economic activity.
Economists and analysts are working feverishly to provide estimates for GDP growth, employment, corporate earnings, and the level of stimulus needed to support the economy. Markets can deal with a dire economic outlook as long as there is relative clarity about the path forward. The uncertainty of the path and severity of the virus has made trying to predict economic results a fool’s errand. Just one example is the estimates for Q2 GDP. Normally economist’s estimates are within 1% to 2% of each other, whereas currently, the range is from +2.4% growth to -14.5% contraction. Analyst and company executives are having an equally hard time providing forward guidance for earnings, leaving investors guessing as to how bad it is likely to get.
While uncertainty has increased equity and credit market volatility, government bond markets have stabilized, and have thankfully settled above the zero bound. There has been some normalizing of credit markets in the past week as monetary and fiscal support is starting to have an effect. Additionally, we hear that Russia and Saudia Arabia may agree to cut oil production, which led oil prices back from the precipice. This is all evidence that we have likely avoided financial contagion that occurred during the Great Financial Crisis. The next thing we need to see is definitive progress in the fight against COVID-19 so the market can begin to see through the fog.
Bottom Line: Expect volatility to continue over the coming weeks as markets deal with the changing realities of the fight against COVID-19. We will break more economic records as the toll of forced business closings and global supply chain disruptions ripple through the economy. This is the first-ever induced recession with pre-emptive monetary and fiscal support for businesses and consumers. Our hope is the support provided along with pent up demand will lead to a quicker than normal recovery.