The U.S. currently has over 1.5 million cases, averaging over 20,000 new cases each day. U.S. deaths have surpassed 90,000. Uncertainty around the impacts of COVID-19 is compounded by the fact that it can be difficult to know how many people have been infected, if they can be re-infected, and that there is no cure, treatment or vaccination.
There are almost 5 million cases worldwide. Many now believe that we will not have an effective recovery until there is widespread and accurate testing coupled with an effective treatment, cure or vaccination. A vaccination could reportedly take 12 months to develop, and uncertainty exists around the accuracy of antibody tests that are currently available.
Remdesivir by Gilead has been touted as a treatment, but the effectiveness is limited at best considering those being treated with this drug are still requiring hospitalization on average of 11 days, and their death rates have not significantly decreased with treatment.
A new vaccine by Moderna, Inc., of Cambridge, MASS, has shown promise in limited early trials. The FDA has greenlighted a Phase II study for the vaccine. Moderna’s is one of more than 10 vaccine candidates currently being studied in humans.
A new disease in children has emerged in the wake of widespread COVID-19 infections. The CDC issued a health advisory on May 14th indicating a new inflammatory syndrome was presenting itself in children, with symptoms similar to toxic shock and Kawasaki Disease. This new disease appears to be associated with current or past COVID-19 infection. The illness is reportedly treatable with early diagnosis, but there have been several adolescent fatalities attributed to this sickness.
“The market’s recent ‘v’ is not for victory.” – The Economist May 7, 2020
US consumer spending has decreased by 7.5% month over month. This is the largest decrease since 1959. In addition, China’s GDP contracted by 6.8% for Q1, representing the first decrease in GDP for China since it began reporting in 1992.
There have been more than 36 million unemployment claims resulting from the outbreak. However, the weekly count of unemployment claims has been declining since late March, so that gives investors hope that unemployment claims may have peaked and look to be on the downtrend. On the other hand, many employees are being called back to work with reduced hours and paychecks.
CARES Act and Additional Stimulus Measures
The CARES Act was passed on March 27th. It contained a $2 trillion stimulus bill that provides $500 billion in company loans, $350 billion in small business aid, $600 per week in unemployment benefits, and $1,200 stimulus checks for individuals earning less than certain amounts. The Act also removed the AGI limit on charitable contributions.
Other stimulus measures have been passed allowing extended unemployment and sick and family leave. In addition, tax filing and payment deadlines have been extended to July 15th.
For Small Businesses
The CARES Act created the Paycheck Protection Program, or the PPP, which provided $349 billion in forgivable loans to small businesses so that they can maintain payrolls. This program ran out of the initial money within two weeks. So on April 24th, Congress passed a new Covid-19 relief package totaling $484 billion. This package provides an additional $310 billion for the Paycheck Protection Program, $60 billion for small business aid, $75 billion for hospitals and $25 billion for Covid-19 testing.
The CARES Act also allows a refundable payroll tax credit or a payroll tax deferral for some businesses. The credit covers 50% of wages paid from employers to employees and is available for wages paid to employees between March 13, 2020 and December 31, 2020. With the exception of employers who have debt forgiven by the CARES Act, eligible employers can defer payroll taxes from the date of enactment through the end of the year until the end of 2021 and 2022.
Obvious Concerns About the Stimulus Spending
The Federal Reserve’s emergency actions have expanded the Federal Reserve’s balance sheet to $9.3 Trillion. This is nearly double the previous record and has expanded the 2020 deficit from $1.1 Trillion to over $3 Trillion.
This increase could put the U.S. debt to GDP ratio around 90% or higher, the maximum recommended by economists. Exceeding 90% could cause an economic slowdown, especially if the stimulus package causes inflation and interest rates to rise. That situation could harm the government’s ability to pay off its debts and put downward pressure on corporate earnings.
Status of Equity Markets
The VIX is at 34.92 as of May 15th, having come down from a peak of 85.47 on March 16th. This level has risen slightly since our last update. It is still significantly higher than its usual range of the low teens. The S&P 500 is around -12.2% YTD, and it has retraced its losses incredibly quickly. It has taken just over half of a month to retrace nearly 50% of S&P 500 losses. This is significantly lower than the average of 5 to 6 months, indicating that the market is recovering unnaturally and unsustainably fast.
The recession caused by COVID-19 could optimistically be classified as an “event driven” bear market by some, which historically has lasted for 9 months and involved an average drawdown of 29%. Unfortunately, an event driven bear market can become a structural bear market, which generally last longer (average of 42 months) and have a higher drawdown of -57%.
Less than 25% of S&P 500 stocks are trading above their 200-day moving average. This indicates that the market is still not recovering broadly enough. The ECRI, a leading economic indicator that tracks jobless claims, mortgage applications, and high yield bond spreads, was at -22.63, slightly rising from the prior week. For reference, 6 of the 7 recessions since 1967 have been preceded by the ECRI going negative.
GDP predictions for Q2 range from an optimistic -12% from Citigroup to a pessimistic -38% from Morgan Stanley. There is a broad consensus that the Q2 GDP will decrease significantly, followed by a less significant Q3 decrease.
How do we recover?
Our recovery could take a “V” shape as current market gains indicate an anticipated speedy recovery. However, others suggest that dire news is not being factored into recent gains. They suggest that the recovery could look more like a “L” or “U” as even after there are treatments available, the economy could take months to resume functioning.
According to Liz Ann Sonders from Charles Schwab, in the future we could see an increased debt to GDP ratio from countries spending their way out of recessions, decreased globalization as distrust of China grows, increased health screenings and decreased tolerance of working while sick. She also believes we could see more fiscal caution from both businesses and governments that realize how unprepared they were for COVID-19, in addition to increased cautious behavior from individuals regarding financial decisions and social interactions.
What does this mean for investors?
Investors should stay invested, as those who “cash out” often miss the market’s best days. According to Putnam Investments, investors who remain invested over a 15-year period earned 9% returns while investors who missed the 10 best market days only earned 4.13%. If investors cash out, they will also lock in their losses. It’s important to keep money in the market so that it can continue to work.
Look for investment opportunities and stay focused on how you can benefit from short-term dislocations. Ultimately, the market should recover, and it still provides a 6.1% annualized historical return over the past 20 years, even including pandemics and global financial crises.
Continue to use the market decrease to employ sound financial planning and tax planning principles such as tax loss harvesting, moving cash off the sidelines, funding retirement accounts, Roth conversions, asset location opportunities, estate planning and gifting.
Stay safe and healthy and take proper precautions when you are away from your home. Also, make sure your estate planning documents are in order. This includes a healthcare power of attorney and living will.
If you are looking for financial guidance during this time of great uncertainty, don’t hesitate to contact a member of the Meld Financial team. Our proprietary Wealth Management system, Financial Fingerprint™, can ensure you stay on the path to financial security.
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