This Sunday will mark the fourth week of quarantine in Ohio. It hasn’t been easy, but it does appear we are “flattening the curve.” However, that is not what moved the markets this week. Last week the catalyst was federal stimulus approaching $6 trillion. This week the catalyst is what looks to be a gradual re-opening of the economy beginning in a couple weeks. Since investors are forward-looking, it shouldn’t come as a surprise that they’re looking toward a day when things will return to normal. I caution that the recovery won’t necessarily be a simple affair but instead a process that will see gains and setbacks over the weeks and perhaps months ahead. However, let’s take this moment to enjoy these gains and recognize that we’re closer to a return to normalcy than we were just four weeks ago.
We learned yesterday, President Trump spoke with state governors about the prospects of reopening the economy as soon as May 1st. He emphasized governors will be in charge of when and how to open, but FEMA and the CDC have developed guidelines on what they consider a safe, phased approach. According to the White House, 29 states are in good shape regarding the coronavirus. With over 21 million people recently unemployed, it is the administration’s first priority to get things moving again. Not surprisingly retail sales have dropped 8.7% in March, while manufacturing output slumped by the most in over 74 years. This doesn’t come without controversy though. Many executives of the largest U.S. companies want to see a dramatic increase in the availability of testing before they would feel confident bringing employees back.
In light of the closures, over $6 trillion has been committed to lessen the economic downturn, with $2.35 trillion in fiscal spending and $4 trillion from the Federal Reserve. This figure represents more than a quarter of U.S. economic output and will mean for the first time since WWII the nation will owe more than its economy can produce in a given year.
Turning to earnings announcements, among the earliest companies reporting earnings are the banks. This week most of the major banks, including JP Morgan, Citigroup, and Bank of America painted a pretty dreary picture. They have collectively increased loan loss reserves by $20 billion in the first quarter anticipating a tidal wave of delinquencies in credit card, mortgage, and commercial debt. JP Morgan went so far as to raise borrowing standards for most new home loans starting this week. Customers applying for a new mortgage will need a credit score of at least 700 and will be required to make a down payment equal to 20% of the home’s value. I anticipate other banks will follow suit. The silver lining, if you want to call it that, is that these banks are not going to be caught flat-footed like they were during the financial crisis.
Among those companies doing well are three that chose to increase dividends this week. Costco, Johnson and Johnson, and Procter & Gamble all raised its dividends. In fact, these companies are doing quite well given the nature of their products and services. While no company is immune to the current economic situation, there are those that can weather the storm better than others.
In closing, I bring you a philosophical dilemma. After the terrorist attacks on 9/11, Congress passed the Patriot Act which had many provisions to help keep us safe. In return we got the TSA, expanded use of FISA courts, and an unfettered NSA. Some believe it went too far. With that as the foreword, both Apple and Google have unveiled a rare partnership to add technology to their smartphones that will alert users if they have come into contact with a person with COVID-19. The “contact tracing” tools they are developing will use Bluetooth technology that tracks whether phones have passed within a certain distance of one another. Users could then be alerted if they were in contact with an infected person. Implicit in this technology is the idea that everyone’s movements will be tracked by a government agency and stored indefinitely. I bring this up to allow everyone the time to consider the benefits of such a system, as well as its costs. After 9/11 we were quick to hand over many freedoms, including that of privacy. I get the rationale for an invisible tracking system, but with each passing crisis, I recognize this country less and less. There are periods in which history moves agonizingly slow. And there are others when it moves with a rapid urgency that was thought unimaginable. The last twenty years feels more like the later than the former.
Bruce J. Mason, MBA