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Economic Commentary | CoronaVirus Policy Responses
The President’s address this evening unveiled a suite of responses to both the CoronaVirus itself and to the nation’s fear-tinged reactions to the CoronaVirus. It almost goes without saying that major policy speeches delivered after stock market closings contain some element of surprise, and by now we all should realize that stock markets hate surprises.
We fully expect the major equity markets to open tomorrow morning (March 12, 2020) with significant sell-offs. They will be a reaction as much, if not more, to the element of surprise as to a reasoned analytical assessment of the economic consequence of the President’s proposed policy steps.
At its core, the virus remains historically a significant world-wide contagion, but not a crippling one. The odds are overwhelming that more people will be infected by, affected by, and die from the flu this season than from the Coronavirus.
The economic consequences are going to be different primarily because of the historically unusual steps which are being taken.
Having positive affect will be the President’s efforts to reduce payroll taxes and to expedite more Small Business Administration and other financial assistance programs of the Federal government to provide businesses with additional credit to weather temporary economic dislocation caused by the reaction to the virus.
Having negative affect will be the President’s efforts to ban travel for 30 days to and from Europe. The unknown here is how much this will affect international commerce. There is no doubt there will be displaced profits – profits that will either disappear or will simply be pushed into the future more than was originally anticipated.
It is this pushing forward of profits which we have discussed in past blog posts. We still stand by that assessment. What we are witnessing will be temporary. What we cannot determine with absolute accuracy is whether the recovery occurs in the 3rd quarter or 4th quarter of 2020, or in the first half of 2021. Our best estimate is still the 3rd and 4th quarters of 2020, but we will see more volatility in the stock market between now and then.
As of this writing (after market close and the President’s comments on March 11th), the Dow futures are off somewhere in the vicinity of another 1,000 points. That is actually more restrained than we would have anticipated. If that level holds, it would take us into the 23,000 range, and this is where some historical perspective can be very helpful.
We’d like to revisit the Dow levels of 2018. All were in what historically were seen as record high levels – the only thing being debated was what level constituted the new supportable high water mark.
Dow in January of 2018: 26,000 range
Dow in December of 2018: 22,000 range
Prior to that the Dow had been on a fairly consistent upward trend from its 18,000 point range in late 2016. In other words, everyone in 2018 would have realized Dows of 22,000 to 26,000 as being in “record high” territory. Whether it was 22,000 or 26,000 was much less significant.
We need to keep these levels in mind as we assess the current Dow’s movements in reaction to the virus and in reaction to policies being proposed to fight the virus. If we lose a thousand, or even two thousand points, in the course of the next several weeks, we will still be in that low-20,000 range.
This will signal that some growth has been bled from the economy, perhaps even that a mild set back has taken hold, but not that a major economic contraction has occurred. The economy will recover, so will the markets, and only time will tell us how long that takes.
We are reminded a bit of the potential responses being floated about to the potential Y2K disaster. Most the fear-induced responses (selling everything you own and moving to a rural setting with your own livestock and garden) would have caused more economic harm than any of the realistic economic scenarios. The reality was much less severe. The economy survived, continued to grow, and we are all significantly better off now than we were in 2000. The same will be true after CoronaVirus is a history lesson rather than a current event.
We will continue to keep you posted as developments unfold. The best advice we can give is to stay calm and carry on. This too shall pass.