Do the Least Harm. Simply put, shutting down the economy has serious consequences. If the economy were to reopen by Easter, which seems impossible now, it would probably open with, at most, 97% of its original capacity. It's like a muscle, without use, it atrophies. And when it does, it needs physical therapy to recover. The longer it's sedentary, the worse the atrophy, the more difficult (and painful) the recovery
The Coronavirus Threat. Policymakers have reacted to the economic damage with massive measures. The Federal Reserve has reduced interest rates to nearly zero, has begged banks to use the discount window, embarked on unlimited quantitative easing, and is backstopping an unprecedented array of markets, including commercial paper, money markets, commercial mortgages, and municipal securities.
Epidemics and Stock Market Performance Since 1980. Since the high for the S&P index on February 19th, it's been an interesting few weeks. To that point, I have attached a chart of the performance of the S&P index over the last 40 years when there have been medical epidemics.
The Coronavirus Contraction. Our best guess – and, at this point, given the unprecedented nature of the situation, anyone who calls it anything other than a "guess" should be taken with a grain of salt – is that the US economy will contract at about a 35-40% annual rate in both March and April, stabilize in May, and then start growing again, gradually, in June. Translating this into quarterly changes, we're projecting a 1.5% annualized decline in Q1, a massive 20% annualized drop in Q2, but with the economy growing at a 3.0% annual rate in Q3 and a 3.5% rate in Q4 and beyond.
Fed Fires Bazooka at Coronavirus Virus. The Fed's statement made it clear it is going to keep rates near zero until the economy has weathered the Coronavirus and is on track to meet the Fed's targets for the job market and inflation. In the press conference, Fed Chief Jerome Powell said the Fed will be "patient," which means it's going to be a while before we see rates go back up.
A Coronavirus Recession? No one knows with any real certainty how much, or for how long, the Coronavirus will impact the US economy. What we do know is that it will have an impact. And, after data releases of recent weeks, we also know that the US economy was in very good shape before it hit.
The Feds should be decisive. Fears about the economic effects of the Coronavirus have driven equity prices lower and led to calls for the Federal Reserve to cut rates. But we think a rate cut – any rate cut – would be a mistake.
Yes, There Was a Housing Bubble, But Not Now. One of the reasons we remain optimistic about economic growth, in general, is the continued recovery in homebuilding.
Lessons from Japan? Thirty years ago, many in the US were in fear that a rising power in Asia was on the verge of eclipsing the US. Now it’s China, back then it was Japan. History, however, had other plans.
Jobs, Coronavirus, and the Budget. Taking all of this together, no recession on the horizon and improving news about the coronavirus suggests corporate profits will continue to grow in spite of moderate growth. Stay bullish!