Desperate times call for desperate measures
If the economic data is so dire, why are markets rallying?
Our Top Market Takeaways for March 27, 2020.
Desperate times call for desperate measures
After a -2.9% slump on Monday, the S&P 500 mustered a whopping +17.6% gain over the past three days (its strongest gain over a comparable period since 1933). Previously plagued sectors like airlines (+34), automobiles (+30%), and oil & gas (+30%) were standouts. Meanwhile, U.S. Treasury yields held steady, and investment grade and high yield spreads made a historic recovery.
Dominating headlines and fueling optimism was the progress of an unprecedented $2.2 trillion fiscal support package from the U.S. government. It was unanimously passed in the Senate earlier this week, but it’s not law just yet—it seems likely to be passed by the House and on the President’s desk by the weekend. Combined with other measures passed earlier this month, the U.S. fiscal response to the COVID-19 crisis adds up to over 10% of GDP—that far exceeds the government’s response during 2009, which, at roughly $800 billion, tapped in at around 5.4% of GDP. Yesterday, our team wrote an overview of the key provisions of the bill, and shared our thoughts on why we think it could steer the U.S. economy away from the “worst-case scenario.” And, of course, all this adds to the “bazooka” the U.S. Federal Reserve delivered, which has provided support to markets and the economy at large by cutting interest rates and pumping cash into debt markets.
We think that policy action of such scale is warranted, given the unprecedented disruption caused by the virus and containment efforts. Desperate times call for desperate measures. We’re starting to see data roll in that shows what markets had already been fearing for weeks: The economic impact of COVID-19 is very real, and it’s ugly.
The most notable example is the historic spike in U.S. jobless claims, or the number of U.S. workers applying for unemployment benefits. After the prior week saw the largest spike in claims since Hurricane Sandy eight years ago, the latest report saw the largest surge in history. More than 3.28 million people filed jobless claims last week (crushing the prior record of 695,000 in 1982). This goes to demonstrate a key distinction our colleagues pointed to in their piece yesterday: There is a very meaningful difference between the latest U.S. fiscal package providing much needed support to the economy and outright stimulus to kickstart a growth recovery.
Line chart shows U.S. initial jobless claims from 1967 through 2020. The chart highlights that in 2020, 3.28 million workers filed unemployment claims, which is the highest level by far during this time period.
The fiscal package underway is hoped to keep a number of businesses from bankruptcy and get cash in the hands of those who need it most. But, as is being made clear from the data, businesses in the United States and around the world have already been forced to cut costs and lay off workers to make ends meet. (After all, no one knows how long the shutdown will last, and the financial clock—marked by interest payments, rent payments, utility bills, and so on—is still ticking.) With that said, it is very likely the unemployment rate will still rise into the double digits (at 3.5% before the outbreak occurred). Recovering from such an unprecedented decline in employment is no small feat, and it will take a while for the labor market to heal once we get to the other side. All in all, the poor economic data this week is really the first notable example of rallying on “bad” news since the COVID-19 crisis began—a key milestone for finding a bottom.
But if the economic data is so dire, why are markets rallying? A few reasons.
- A lot of bad news was already in the price. After the S&P 500 dropped -34%, the market has been expecting really ugly economic data. That said, a big chunk of selling pressure seems like it could be behind us. Most asset classes are still (or are close to) pricing in a recession, even after the rally.
- There is clearly some initial enthusiasm for the fiscal stimulus package. By providing key support to states, businesses, plagued industries (like airlines), hospitals and individuals, there is a hope that the package that’s poised to pass will mitigate some of the overall economic toll.
- We are seeing signs that the Fed’s efforts to ease the liquidity crunch are paying off, as credit markets have begun to stabilize. For example, the Fed announced that it will now buy investment grade debt, offering much needed support on the demand side of the fixed income market. Investment grade bonds have rallied significantly—their spreads over U.S. Treasuries have compressed by over 60 basis points since Monday, more than in any other week since the start of the J.P. Morgan JULI Index.
Line chart shows J.P. Morgan JULI U.S. Investment Grade Index spread to U.S. Treasuries from January 2019 through March 2020. The chart highlights that, in 2020, investment grade bonds had a massive selloff, which was closely followed by a historic recovery that started early this week.
We want to be clear that the fiscal and monetary support isn’t a panacea for the stress in the investment landscape.
We expect there to be more demoralizing economic data ahead, and it’s likely volatility will persist. Ultimately, this is about stopping the COVID-19 outbreak, and containing its spread is going to be crucial to seeing a sustained recovery in the economy and markets broadly.
Michael Cembalest, our Chairman of Market and Investment Strategy, has been compiling an extraordinary body of work around this issue. Given the importance of the path of the virus itself, as well as its market and economic impact, we encourage you to explore Michael’s work here.
As we continue to navigate this global pandemic, please let us know how we can help. Your J.P. Morgan advisor is eager to help.
All market and economic data as of March 2020 and sourced from Bloomberg, FactSet and Gavekal unless otherwise stated.
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