Midweek Macro – 5.20.2020

“Asset prices remain vulnerable to significant declines should the pandemic worsen, the economic fallout prove more adverse, or financial system strains re-emerge”
-Federal Reserve Bi-Annual Financial Stability Report

The S&P500 is down 1% in early trading this morning as vaccine experts raised caution yesterday about too much public optimism over the recent vaccine tests coming out of Moderna. Stocks rallied coming out of the weekend on news that the Massachusetts company was making significant progress in their phase 1 vaccine trial for COVID-19. Experts have chimed in saying that Moderna did not release enough data to instill scientific confidence, and that there are still many factors to control for not accounted for in the initial media blitz.

While many are hoping for a V-shaped recovery where the U.S. and global economy rebound to January 2020 levels, the FED board of governors are taking the mic pretty frequently to add asterisks to those hopes. Chairman Powell took the stand (from home) alongside Treasury Secretary Mnuchin yesterday in a testimony to congress about the fiscal and monetary response to COVID-19. The two faced tough questions over the Trump administration’s plan to quickly reopen the economy, especially in regards to protections for low-income workers.

Ohio Senator Sherrod Brown put Mnuchin on the spot by asking “How many workers should give their lives to increase GDP or the DOW Jones by 1,000 points?”

As continuously pointed out in this commentary, the response to the virus must balance the negatives for public health and the economy and Mnuchin echoed concerns from the administration and economists that prolonged lockdowns pose “risk of permanent damage” to the economy.

The congressional budget office released an updated economic forecast in which they project the U.S. economy will shrink by ~38% in Q2 but expand again by ~22% in Q3. They project it will take until the end of 2021 for GDP to return to its Jan 2020 levels, and even at that point the expectation is that unemployment would be around 8-9% which is almost double what it was over the last couple of years.  

These published projections from fancy economists can feel comforting, but with the amount of uncertainty at play, typical big players in downturns (like Warren Buffet) are taking a bit more caution this time around. It all comes down to our society’s ability to keep the impact of a second wave of infections to a minimum and to ensure that both employers and individuals survive as to maintain a healthy amount of consumer spending coming out of the lockdown restrictions.

North Carolina is set to reopen bars and restaurants this Friday at 50% capacity, as 108 million people in north-east China once again enter a strict lockdown as a cluster of 34 cases have been discovered in the Jilin province. Most delivery services have been halted there and citizens are banned from buying anti-fever medication to prevent them from hiding their symptoms.

It’s important that we hold our leaders accountable to ensure that we can re-open in a way that will put the economy back on track and minimize the risks of another plunge into lockdown, because as the FED’s Biannual Financial Stability acknowledges, the amount of fear and uncertainty that could come from a major second wave of infections in the markets might make this recovery slower than we’re all hoping for.

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