Apr 01, 2020 | 09:25 am
I woke up on Monday morning to peels of thunder and a wet, gray day. The mood reflected my expectations for the upcoming week’s news. It is now Wednesday morning on the east coast.
First, a recap of old news: On the monetary policy front the Federal Reserve lowered interest rates to zero and began its massive infusion of cash into the economy. On the fiscal policy front the government approved a $2.2 trillion stimulus package – the largest ever. In a sense, that’s good news – evidence that the government is committed to significant action. But having used up most of its response options early, now all we can do is wait to see whether promised financial assistance will arrive in time and whether it will be sufficient to maintain the economy.
The sobering reality is that from now on we should expect a steady beat of negative economic news. The record-breaking job losses reported last week will likely be followed by reports of further job losses, numbering in the millions. Reports about deep contractions in economic activity will soon give us a sense of how badly the economy is being mauled.
Much of the immediately upcoming news will understate the damage to the economy. This is because upcoming monthly job loss and market sentiment reports will still contain a couple of weeks in March—prior to the big wave of layoffs.
Some of you may be wondering why the stock market was able to stage a partial comeback while reports of job losses and confidence declines surround us. This is because the initial declines of over 30% already anticipated difficult economic times ahead. By the time most reports were released this week, the most immediate damage to the stock market was baked-in. The key moving forward is whether investors’ expectations will change based on “new” news. I would not be surprised to see a downward drift in markets, as investors become increasingly gloomy with the release of consistently negative reports regarding infection rates, unemployment increases, and economic activity declines.
Most observers are certain humanity will weather this storm. The only questions are how long that will take, and how badly the economy will be damaged. A short-lived crisis will likely lead to a quicker recovery, on the order of a few months. A longer crisis which saps morale, scars consumers for an extended period, and forces many companies out of business, will be far more devastating, and may require years for recovery. A prolonged downturn will destroy some of the fabric of our economy, but potentially also some of the fabric of our society. Government responses will be key to minimizing the length of any downturn and ensuring sufficient safety nets and equitable sharing of available resources.
Here's what you can do:
Markets will likely move as more economic reports are released in coming days. Be prepared for more market volatility.