Quick economic update on what happened Friday, why we rallied and what to expect this week.
On Friday, President Trump gave his best press conference of his administration demonstrating the steps the federal government is taking to address the coronavirus outbreak and attempts to mitigate the impact on the economy. This went extremely well with Dr. Fauci from the NIAID and numerous CEOs stepping up to explain the concerted effort. This led to a massive rally in the US stock markets with the S&P ending up +9.5%.
Last Thursday, I listed 3 key things I wanted to see happen to help stabilize the outbreak and the markets. Let’s quickly review to see what’s changed.
First was President Trump declaring a national emergency. This happened and it will allow approximately $42 billion to quickly flow out to the states and cities to combat the virus.
Second was a drop in the number of infections in the United States. While we saw a brief drop from Thursday to Friday, the opposite occurred on Saturday. In other words, we’re at the beginning of a significant surge in the number of infections announced by the US.
Why? Because the US is finally increasing the number of test kits provided to hospitals and patients. The US is also working on a plan to create what South Korea has: drive through testing. Wal-Mart and Target are offering their parking lots to accomplish this. As well, Google or a sub of Google Verily is working on a test site in San Francisco for people to find a testing area and hopefully direct people to it. This will reduce the burden on the nearby hospitals. As an example of the expected size of the outbreak, NYC hospitals are preparing tents on the hospital grounds for testing and for triaging patients. Yes, they expect it to get his bad.
The third thing I was looking for was for China’s numbers of infections to drop to zero. This is close to happening with the number of daily new infections down to less than 20. Of course, everyone will say the Chinese are not providing accurate numbers. However, if they want their workers to get their factories going and stay running, the Chinese have a big interest in being honest and containing the virus.
Where does the economy, markets and virus go from here?
The US economy is going to take a big hit as businesses and consumers go into a shelter in place for the coronavirus. Spain and Italy have shut down all non-essential retail businesses. Apple and Nike announced closing of their stores for 2 weeks. Today, CDC’s Dr. Fauci has expressed he wants the US to be overly cautious when it comes to the virus and act by following the same path. He said he wants people to hunker down and take this seriously. Sadly, in the US, we had the St. Patrick Day and way too many people went out to drink in bars. This likely helped spread more of the disease. I think we’ll see a push to have the shut-down happen this week as infections spike. It will have a big short-term, negative impact on the economy and businesses except for grocery stores and pharmacies.
As I’ve been saying, we’re going to see a spike in the number of infections in the US as more testing gets done. Given that we still have bottlenecks and a shortage of testing kits needed to accurately see how many are infected, you can expect US numbers to grow rapidly this week into next. So, I think we don’t see the peak of infections until late March. The good news is that more help is on the way.
Speaking of help on the way, we have a Federal Reserve meeting this week and expect them to announce a resumption of QE to assist the economy and continue to make a massive amount of liquidity available to banks. Hopefully, this can get out to businesses. This is not a spend, like fiscal dollars for shovel ready projects or a payroll-tax cut, but it’s going to help. Expect that on Wednesday.
Also expect a smallish stimulus plan from Congress with the House already passing a plan. Now, the Senate won’t act quickly on this as they doubt the merits of the spending and will drag their feet if they see the markets recover. But what I want to see is more money dedicated to healthcare facilities and respirators than on bailing out any industry impacted by the virus. We’re also seeing states declare emergencies and ask the Trump administration to utilize the army to help.
As a reminder, what we’re looking for on the markets is a change to the negative narrative we’ve seen over the last two weeks. We got our first taste on Friday and we’ll watch to see what happens this week. My guess is that at best we’ve put a temporary floor into the S&P near 2,480.
Make no mistake, we’re just getting these policy changes implemented and there is going to be more bad news on the way. It will be another difficult week with a lot of volatility in the financial markets. However, Friday was an important step to change the narrative on the markets and the economy.
I’m Andy Busch, economist, market expert and keynote speaker.
You can get all these videos on my YouTube page and I’ll be posting on my website as well.