“V Shaped” Recovery Could Be Afoot
With the volatility in stocks, few investors seem to care about economic analysis. However, now that we are beginning to get the weak data from March coming out, it will be interesting to assess the damage. Personally, I think once the shutdown is over, the economy will have a ‘V shaped’ recovery because this was a temporary shock to the system.
Our ability to recover will depend on how many jobs are lost permanently and how many small businesses go under. Some people will be working from home or will be without a job for a few weeks, but that is easy to recover from. If small businesses get the proper support they need from the government, in terms of zero interest loans, we will see a quick recovery.
The energy sector won’t see a quick recovery unless OPEC+ makes a deal to cut production. Even if demand increases, we won’t see oil get back to the $50s. OPEC+ wants shale oil to face severe problems. We need to see major bankruptcies before OPEC+ will cut production.
After a bunch of frackers go bust, it makes sense to buy the stocks of the firms with the least debt such as Chevron and EOG Resources. These firms will be around for many more cycles. Low debt is the key to long term survival.
To be clear, I’m not referring to stocks in both the prediction for the economy and energy. Stocks will rally once it’s clear the situation is under control even if worse coronavirus data is coming. Energy stocks can rally with the rest of the market. But they will underperform unless OPEC+ cuts production. Once a bunch of firms go bust, the major firms will thrive as they will buy oil drilling sites at pennies on the dollar.
Our First Weak Economic Data
Preliminary March University of Michigan consumer sentiment report was one of the first economic reports that showed weakness caused by the coronavirus. In my opinion, it was a solid report even though it missed estimates. Everyone knew it would be bad, but it wasn’t that bad.
Specifically, the index fell from 101 to 95.9 which missed estimates for 98, but was above the lowest estimate which was 94. Personally, I can’t imagine who would project the index to be 100.2 after what has happened. But that was the high end of the estimate range. Analysts will likely get too negative in April, but that depends on how long this shutdown lasts.
Current conditions index only fell from 114.8 to 112.5 probably because this is a preliminary report. Most of the damage to the economy likely hadn’t happened during the survey period especially in the beginning of the month. That expectation of damage caused the expectations index to fall from 92.1 to 85.3. It’s only down 3.9% yearly.
This data isn’t that bad, meaning the 2nd half of the month needs to be terrible for Q1 GDP growth to be weak. Many actually think the 2nd half will be terrible. It will be bad enough to submarine the whole quarter. Think of this as a really bad hurricane or snowstorm that impacts the entire country.
According to the University of Michigan’s Chief Economist, consumers are staying confident because they view COVID-19 as temporary. There are 2 important takeaways from that perspective in my opinion. Firstly, retail sales will be hit harder than sentiment indicates because it’s not fully reflecting the recent negative catalyst.
Secondly, it means after this impact ends in a few weeks or months, consumers will be ready to spend money quickly. If you expect a negative event to end shortly, when it ends you will have no problem becoming confident again. There will be pent up demand if there aren’t large layoffs.
Initial response to COVID-19 isn’t as bad as the panic before the Great Recession.
That’s likely because the housing market peaked a couple years before the financial crisis. I’m sure some people were worried about losing their house in 2007. Even if you have a job, if the adjustable rate on your mortgage goes up, you might not be able to afford the payments. There is almost nothing like the fear generated from potentially losing your house.
Part of the March sentiment reading that fell the most was the prospects of the economy for the next year. This part fell 29%, representing 83% of the decline. Consumers now are more optimistic about the next 5 years than the next year which is the opposite of last month. This makes perfect sense because COVID-19 won’t be an issue in 5 years.
Chief Economist stated the following about potential policies to help the economy deal with this impact: “The best policy antidote would be immediate relief provided by multiple sources of cash transfers and debt forbearance. To avoid a recession, speed is more essential than targeting. Moreover, maintaining confidence in the effectiveness of economic policies is essential, otherwise the intended behavioral reactions on spending may not be forthcoming.”
Targeting sounds good, but the reality is most people are affected by this. This isn’t like a hurricane that only impacts low lying areas. It will reverberate throughout the economy. Therefore, I agree with his point. Personally, I would rather see a stimulus check given to people instead of a payroll tax cut because the payroll tax cut will only help people little by little. A check helps people immediately. Plus, a payroll tax cut doesn’t help people who have lost their jobs.
The consumer was still confident in the beginning of March likely because the full impact of COVID-19 wasn’t felt by then. Consumers also were confident because they think this will be temporary which it probably will be. That being said, retail sales will be hit hard.
Consumer confidence in the next year took a big hit which is reasonable. Hope is a fiscal stimulus helps consumers sooner rather than later. If the government waits too long, it will be meaningless. The economy will fall into a recession this year. And the hope is job losses are mitigated by the temporary nature of COVID-19.
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