It was a relatively quiet week in the debt and equity markets, with the S&P 500 and the yield on the 10-year treasury trading at similar levels to where they were when we issued our last update report last week. Stocks appeared to begin to sell off last week after earning season kicked off a string of earnings reports that sounded more like a call to a suicide prevention hotline than a quarterly conference call. But that wasn’t something that another half a trillion dollars couldn’t cure. After the Paycheck Protection Program ran out of money just two weeks after it started, Congress authorized an additional $320 billion in funding for the SBA, mostly directed to the continuation of employment. In for a penny, in for $10 trillion, as they say. The measure steadied the market after it had sold off over 4% to start the week and brought us back over the pricey 2800 mark on the S&P that we’ve spoken of previously.
The only real volatility (relatively speaking) was in the oil markets. There we saw action that would have otherwise been unthinkable a few short weeks ago. The price for a barrel of oil for May delivery fell to NEGATIVE $34 per barrel. That means if you had an unsold barrel of oil, you had to pay someone $34 to take it off your hands. At least for a moment, a barrel of oil had become no different from a gigantic trashcan sitting in someone’s back yard full of fresh, steaming dog-poop. Not a commodity…but a waste product.
You see, oil can’t be turned off by flipping a switch. Many wells will suffer structural damage if they are shut in completely. It is apparently better to sell your oil at a loss for the near-term than it is to destroy longer-term profits. So, with tanks at refineries full, the nation’s strategic oil reserve all but spilling over, and fleets of oil tankers idling offshore with no port to offload to, the world is literally drowning in oil. Of course, when the stay-at-home orders are lifted, we will start driving and flying again, which should cause oil surpluses to abate to levels that should allow for a barrel of oil to be worth at least as much as a stack of used newspapers, if not more. But in the meantime, we are witnessing a Bizzaro World version of the energy market.
Like our prior discussions where we theorized that all discussions of a recovery in the economy are pointless until we get past the worst of the virus, the same is true of the oil markets. Oil simply cannot recover in price until we, the world, start using it again. And we won’t start using it again until we can leave our houses, drive our cars to work, or load into planes and fly off on vacation.
So what is going on with the SARS-Cov-2 virus and the number of cases of COVID-19? Well, there is both good news and bad news. The good news – newly reported cases in the United States have seemly peaked at an average of just above 30,000 per day. The bad news… they are still at that figure, three weeks later. Even Italy’s cases, which peaked at around 6,000 per day, had evidenced meaningful decline before three weeks after peaking. (The U.S. is 5.5 times more populous than Italy, therefore our peak of daily new cases is quite proportional to Italy’s). If we were mirroring Italy’s pattern, which is one of the worst-case models we could follow, then our cases should be dropping to around 23,000 per day. And although we have seen some daily reports in that range, the sustained weekly averages are not showing much movement off of our highest levels. This coming week should prove crucial in providing us with data. To put it bluntly, we need some good numbers this week. With many states planning on lifting their stay-at-home orders at the end of April, if our base-level of cases isn’t significantly lower by then, there is a very real danger of a new level up in the spread of this contagion.
Let us hope that the declines seen in Italy and other European nations do prove to be the pattern that we follow in the coming days/weeks – because there the news is encouraging. Italy continues to see its new cases moderate. Its new daily cases are roughly half of its peak from a month ago. The neighboring nations of Austria and Switzerland, which we have been tracking closely, are now seeing new case numbers so low, they don’t warrant reporting. Germany has reversed not just the number of new cases, but the total of all active cases, and is making plans to begin reopening its economy. Even new case counts in France have been generally dropping. Only the U.K., which was late to the party like the United States, has not seen declines in its virus growth rates. (It too is plateauing.)
Let’s jump back to the economy. Five weeks after the initial wave of unemployment claims hit, roughly 26 million people have lost their jobs. That’s up over tenfold from the generational low reached just before COVID-19 hit the U.S. For the week ending April 11th, the unemployment rate climbed to 11%, up from 3.5% less than two months ago. But there may actually be some good news in the data. This week’s initial jobless claims were down to 4.4 million after peaking at just under 7 million new claims three weeks ago. Though more job losses are certainly ahead of us before we probe the worst levels of the unemployment data (the CBO yesterday issued an estimate of a high of 14% in Q2), here too we must peak and then recede, which appears to be happening…for now.
Next Wednesday will be a big day. We will get our first glimpse of the impact of COVID-19 on GDP. Estimates are calling for a decline of 1%-5%. We will also get a chance to see pending home sales for March. That data point will begin to paint the picture of just how hard the housing market might get hit before the economy firms. However, we caution, as we have before: don’t look too closely at these numbers. We are a month away from the earliest conceivable trough in the economy. Rearward-looking data will prove irrelevant in the months following the abatement of the virus. (Yesterday’s CBO forecast called for a decline of 0.9% in Q1 and an unimaginable drop of 11.8% in Q2 before rebounding in Q3 and Q4, +5.4% and +2.5%, respectively; for a net decline of 5.6% for 2020 as a whole.)
In short, this was an uneventful week – in the Bizzaro-Coronavirus World. But that’s not necessarily a bad thing. It puts us one more week closer to being over the worst of this crisis. Yes, it appears that we’ve flattened the curve, now maybe we should be talking about bending it back down, so we can get beyond this thing.
Jim Scheinberg CIMA
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