Economic Reflections

An Acceleration of Effects | March 16 – 20, 2020

by | Mar 23, 2020 | Economic Reflections

As of March 20, The World Health Organization (WHO) has confirmed 209,839 cases of people testing positive for COVID-19 across 168 countries and territories, a significant increase from what was reported just one week ago. As the number of cases and deaths increases, we expect to see policy responses intensify as well. Though some people think that historical crises (e.g. WWII, the OPEC embargo of 1973-74, the Great Financial Crisis) were addressed in a clear and systematic way that led to a speedy and effective resolution, the reality was far messier. Human responses to crises are always iterative, with society only gradually grasping the problem at hand, with policy coordination evolving slowly in fits and starts, and with people usually reluctant to acknowledge the depths of the challenge at hand.

Certainly, this crisis is no exception, which makes these weekly updates serve to some degree as a partial diary of a reluctant society dealing with an uncertain, and thus far unrelenting, threat.

Over the last week, many Americans saw an acceleration of the effects from the coronavirus crises, with many for the first time directly feeling an impact to their daily lives. Through March 19, 44 states have closed the schools that serve 47.9 million K-12 students. (Source: Exact numbers are hard to come by but the number of employees working from home increased dramatically. Unfortunately, only about 29% of the job market was able to work from home through 2017-2018, according to the US Bureau of Labor Statistics. Numerous closures of non-essential business such as restaurants (see graphic), bars and entertainment venues—either voluntarily or through jurisdiction bans—have forced millions of Americans to bunker in at home. By the end of the week, a San Francisco stay-in-place order expanded to all of California affecting nearly 40 million people. New York and New Jersey followed on Friday.

Many people are working remotely; many are not working at all. Initial jobless claims spiked 70,000 for the week ending March 14, before the largest wave of bans and closures hit. With many states seeing an unprecedented spike in initial claims early this week—including a more than 10-fold week-on-week increase in some states—claims could spike dramatically for the week ending March 21. Indeed, James Bullard, President of the Federal Reserve Bank of St. Louis, predicted this weekend that the U.S. unemployment rate may hit 30% in the second quarter. This will undoubtedly rock the economy for the near-term and could take years to absorb if it worsens in depth and time horizon, as is possible.

The past week saw a flurry of policy moves as the number of global central bank (monetary) responses increased rapidly in tandem with the number of governmental (fiscal) responses. On both the monetary and fiscal fronts, with each subsequent announcement, the scale of the responses has increased in magnitude. After passing the second bill in response to the coronavirus outbreak by mid-week at an estimated cost of just over $100 billion (source: Joint Committee on Taxation) Congress almost immediately began work on a third, much larger bill that likely will exceed $2 trillion. Unfortunately, that bill appears to have hit roadblocks over the weekend and while the White House anticipates a vote on Monday, it is not clear that the initiative has broad enough support.

Central banks have continued their efforts to ensure that the financial system remains functional, which will mitigate some of the challenges of the crisis and speed recovery on the other side. For example, the US Federal Reserve intervened in the commercial paper market and stepped in with a commitment to backstop the US money market industry even as Goldman Sachs has already been forced to prop up two of its money market products. Meanwhile, the European Central Bank intervened in the Italian debt market and launched a €750 billion Pandemic Emergency Purchase Program (PEPP) until the end of 2020. The Bank of England cut rates down to 0.1% while increasing its asset purchase program by £200 billion to £645 billion in total. Other monetary highlights this week include moves made by the Peoples Bank of China, Reserve Bank of New Zealand, Hong Kong Monetary Authority, and Bank of Japan.

Calls for additional global fiscal stimulus began to be answered during the week. France dedicated €45 billion in immediate aid to French businesses and employees while backing €300 billion in small- and mid-sized business loans. The UK announced multiple measures including £330 billion of government-backed loans to support impacted British companies, a three-month mortgage holiday, 10,000 cash grants for smaller firms, and an extension of the business rate tax holiday. Canada, too, announced C$27 billion worth of aid.

We will continue to track these policy responses, attend to market conditions, and closely monitor portfolio allocations and investment managers. Please do not hesitate to reach out to Syntrinsic with questions or comments.