Economic effects of the global coronavirus AKA SARS CoV-2 or Covid-19 have spread recession around the planet, sparking mass layoffs by large-and-small employers hoping to cut payroll costs to survive. U.S. unemployment zoomed up to 4.4% from 3.5%, only reflecting jobs losses through March 12. Jobs losses from March 12 to present will be far worse after nationwide “shelter in place” orders went into effect. Job losses in the restaurant, hospitality, transportation and entertainment industries all spell doom for the U.S. and global economy going forward. Hope of a V-shaped recovery in U.S. and global stock markets faded, as the consequences of job losses and economic contraction became a reality. Wall Street seems to shrug of economic facts looking only ahead to better days, where the nation’s biggest funds look for the proverbial bottom before things start to rebound.
President Donald Trump faces tough sledding on the economy as he seeks reelection in the fall. Before the coronaviurs hit the U.S. with a sledgehammer, the 10-year-old bull market was beginning to deteriorate, as price-to-earnings multiples in markets got way out-of-hand. Market corrections come when inflated share prices become unsustainable for investors, prompting the nation’s biggest funds to take profits. Before Trump was inaugurated Jan. 20, 2017, economists predicted recession in 2018. Trump’s sweeping corporate and personal tax cuts Dec. 22, 2017 was probably enough fiscal stimulus to push the recession back for another year or so. But when Federal Reserve Board Chairman Jerome Powell hiked interest rates in 2018 three times, it slowed expectations for U.S. GDP Growith. Trump complained bitterly of what Powell did to the economy hiking rates.
By the time 2019 rolled around, Powell saw the effects of rate hike, then beginning to slash rates again, providing some monetary stimulus to keep Wall Street and the economy rolling. By the time 2019 ended, the economy was already overheated, beginning to show signs of deterioration. Wall Street hit its peak Feb. 12, with the Dow Jones Industrial Average hitting record high at 29,551. When the SARS CoV-2 started to impact the market, the nation’s major funds sold off, leaving the Dow at mid-day today at 20,923 or down 30%. Wall Street continues to seesaw but has been heading down since Feb. 12. With unemployment soaring, Allianz Se economist Mohamed El-Erian sees more volatility ahead with markets testing new lows. Billionaire bond trader Jeffrey Gundlach sees markets hitting new lows before finding a bottom. Unlike the 2008 Financial Crisis this meltdown is different.
Trump wants to restart the economy, ending national ‘shelter in place” orders but sees the carnage in his home state of New York. With Wall Street stuck in the epicenter of the U.S. SARS CoV-2 outbreak with 102,863 total cases, 9.810 new cases and 2,936 deaths, it’s going to be difficult not to follow medical advice. Recent forecasts by Trump’s 63-year-old chief immunologist Deborah Birx see U.S. deaths soaring to between 100,000 to 200,000. No matter how wild the predictions, the economy’s going to remain in lockdown mode for some time, creating more lasting damage to the U.S. economy. When Fed Chairman Powell slashed interest rates to zero March 15, it signaled his expectation of recession or worse. When employment data hit after March 12, it’s going to spook Wall Street, causing more panic selling, with the Dow, Nasdaq Composite and S&P 500 testing new lows.
Unemployment claims skyrocketed to 9.9 million, even before the employment report comes out after the nationwide lockdown March 12. “Given the timing of the report, our sense is that layoffs were not the main driver of the weakness in this report,” said Neil Dutta, head of economist at New York-based Renaissance Macro Research, suggesting the job losses were due to a macroeconomic trend, not only the coronavirus pandemic. “Indeed, jobless claims did not rise that much, at least during the payroll survey week. Instead, the drop came as hiring plans were put ice,” said Dutta. Whatever the reasons, SAR CoV-2 has accelerated whatever was wrong with economy. Non-farm payrolls fells by 701,000 in the first major decline since Sept. 2010, around the time the economy rebounded from the 2008-2009 Great Recession Job losses are expected to get much worse in April.
Long-term investors, especially individuals invested in pension funds, 401(k)s or IRAs are in for a rude awakening, letting financial advisors to allocate traditional ratios of stocks and bonds. Ordinary investors could easily loose 40%, 50% or more if the SARS CoV-2 crisis lasts much longer. But regardless of when it ends, the stock market will continue to struggle going forward. Unlike 2008 when the fix involved liquidity and intervention by the Fed, no one knows how long the coronavirus pandemic will continue. After gaining 275,000 jobs in January and 204,000 in February, job losses will be staggering in March, April and beyond. “We cannot precisely quantify the effect of the pandemic on the job market in March,” said the Labor Department. As Fed Chairman Powell said, the Fed is in uncharted territory managing the economy during an unprecedented health emergency.
