B. Riley Wealth Management Advisor Talking Points: How Soon Will The U.S. Economy Recover From The Coronavirus Pandemic?
This week the S&P 500 Index gained 3.5%, and the NASDAQ gained 6%.
Year-to-date, the S&P 500 Index is down -9.3%, and for the past year, it is now up 1.75%. The tech-heavy NASDAQ Index is up year-to-date 1.66%, and for the past year, it is currently still up 14.8%.
Again, given the near-complete shutdown of the U.S. economy, only being down 9.3% year-to-date is a minor correction in the stock market.
Here are the primary reasons why investors have been willing to look beyond the carnage of the current economic crisis.:
- Technology, the largest sector of the stock market, has not been materially affected by the pandemic and has continued to thrive.
- Oil prices are rising as the economy is beginning to reopen around the country.
- Congress and the Federal Reserve have flooded the U.S. economy with $3 trillion in cash and $6 trillion in loans, in order to offset a lot of the economic damage
- Scientists and researchers seem confident that they will shortly find several effective treatments and vaccines to combat COVID -19 within the next 9-to-18 months. In addition, despite the terrible rising death toll, the national trend of new cases seems to be plateauing.
- Of those businesses that have reopened, overall reports show consumers are showing up at a higher level than was expected by the National Association of Independent Businesses. According to the Washington Post, in China, Disney reopened their Shanghai Disneyland last Monday, and tickets sold out within 20 minutes.
The Impact on Unemployment and Small Businesses
The current unemployment numbers are enormous, but you can’t compare these numbers to any other time in history.
When economic history books are written in the future, there will always be asterisks after these numbers because they will be historically unique.
We didn’t shed 30 million-plus jobs naturally. It was basically a forced shutdown.
The government said we have to close down the entire U.S. economy in order to address the health pandemic. And that is what we have seen happen.
The objective of the recent $3 trillion emergency legislation and the $6 trillion Federal Reserve loan facility was to make sure every unemployed worker and small business was eventually made whole during this two to three-month economic shutdown.
The challenge has been the difficulty of the state and federal government to distribute these funds. This has not been there finest hour! The money has been appropriated, but it is taking the government bureaucracy forever to distribute it to its intended recipients.
Temporary Job Losses Or Temporary Furloughs
We should look at the climbing unemployment rate more as temporary furloughs for the next couple of months, rather than something permanent or long-term.
We could see unemployment numbers over the next two months spike up to depression-era numbers. But once the $3 trillion in emergency assistance and the $6 trillion in Federal Reserve business loans kicks in over the next two months, they should offset and reduce a large percentage of those unemployment numbers.
Businesses that were basically healthy before the crisis will eventually reopen, rehire, and return more or less to normal. The one bright spot in the latest jobs report was that nearly 80% of the unemployed said they had been “temporarily” laid off and expected to return to their jobs in the coming months.
In March and April 2020, 30 million people lost their jobs, and the vast majority of job losses came from six industry sectors:
Travel and Leisure: These are bars, restaurants, theme parks, airlines, cruise industry, etc. This category will be the slowest to recover. This sectors may not fully get back to normal until after there is a vaccine.
Education and Health: These are temporary job losses. Most are teachers who will return to work when schools reopen. Health care workers outside of hospitals will also return to work as the economy reopens. Also, the dentist’s assistants and elective surgery have been suspended during the crisis.
Businesses and Professional Services: These are also temporary job losses. Most are lower-level employees at office buildings that were closed and who will return to work when those businesses reopen in the next two months.
Retail: These are also temporary job losses. Most are retail store employees who will return to work when those businesses reopen over the next month. Many of the stores, like JC Penny and Neiman Marcus, were near bankruptcy before the pandemic. They are filing for bankruptcy reorganization, but that doesn’t mean they won’t continue to operate during that reorganization.
Manufacturing: These are also temporary job losses. Most are manufacturing employees who will return to work when those plants reopen over the next month.
Construction: These are also temporary job losses. Most retail construction will restart this month. Homebuilding permits rose sharply this past month.
This Transition Has Been Painful
The economic devastation of the Coronavirus is evident, with over 30 million people unemployed, and millions of homeowners are delaying mortgage payments, and food banks are seeing lines of cars that stretch for miles. Forty-six percent of all Americans say their household has experienced some form of income loss from layoffs, reduced hours, unpaid leave, or salary reductions.
Part of the problem has been our broken state and federal government delivery systems. Most people still can’t file for unemployment benefits because of antiquated computer systems overwhelmed by the crisis. The money is there, and eventually, people will get what is owed to them, but in the meantime, Americans are suffering.
Because of the Small Business Administration’s antiquated computer systems and confusing lending rules, most small businesses who filed for forgivable loans if they keep employees on the payroll, have still not received any money months after the crisis began.
The reason so many small businesses have had to lay off many of their employees is because of government payment delays. But the money has been appropriated and eventually will be sent to those small businesses. Most analysts believe they will then hire back many of those employees that have recently filed for unemployment.
Depending on how fast the federal government can release the money under the Payroll Protection Act, we will then see the unemployment rates go down.
How Soon Will Economies Recover From The Coronavirus Pandemic? Can You Look to China For Answers?
Although it may be hard to trust China’s health statistics, everyone can see what is happening as China reopens its economy.
A recent article and report by Hong Kong’s South China Morning Post stated that based on China’s economic reopening that it could take countries about three months after lockdown restrictions are eased to get their economies back on track. That means it may take the U.S. until early to late August for a return to relatively normal levels of business activity.
Given that China was the first country to impose stringent lockdown measures, and also the first to lift them, an examination of China’s reopening data could help us in predicting what may happen in the U.S.
Here is a summary of what the report found:
- While most sectors, particularly hotels and catering, saw a decline, the finance and information technology sector reported positive annual growth. The outperformance of technology is clearly due to the surge in online shopping and massive demand for cloud services, as many people needed to work from home.
- There was positive growth in the banking sector because the Chinese government has encouraged financial institutions to support virus-hit corporations and small businesses.
- Consumer consumption accounts for almost 60% of China’s economy. While food consumption grew sharply during the coronavirus outbreak, discretionary expenditures, including cars, jewelry, and catering, reported at least a 30% drop during the lockdown but has now returned to year-over-year growth levels.
- Real estate investment has outperformed, which suggests that property demand is still holding up. Housing sales in China more or less recovered by mid-April.
- The manufacturing sector has recovered much more rapidly than certain service industries. Industrial production in China saw a V-shaped recovery increasing 32% month-on-month.
- Retail sales have increased year-on-year but at less than 1%. But that is still growth.
- Economists believe China will return to normalcy before the third quarter of 2020.
Investors are being inundated with depressing economic data every week. Although it doesn’t look pretty, stocks continue to gain ground, as America starts to reopen.
I still believe the S&P 500 Index will end the year higher.
For investors, the best strategy is not to be panicked into selling but to ride out this economic disruption for the next few months and solely focus on your health and the health of your family.
We know this is a very fearful time, but B. Riley Wealth Management is here for you, and we will continue to share our stock market views every Monday. Thank you for reading.
NOTE: This report is authorized for distribution to clients
Paul Dietrich is the Chief Investment Strategist for B. Riley Wealth Management. B. Riley Wealth Management offers comprehensive financial solutions to clients through its network of
over 160 experienced financial advisors across 13 states. The firm manages more than $11 billion in client assets and serves approximately 34,000 client accounts.