The Other Pandemic
There has been much concern and much focus on the health aspects of the coronavirus, as there should be. But there is another pandemic that has been brewing in the background. That other pandemic is a global economic crisis which has been rapidly growing and is now at a pandemic level, just as is the coronavirus.
It is the worst of tradeoffs that society has to make given this dichotomy between the health aspects of the virus and the global economic crisis that the virus has spawned. If we focus on only the health aspects, we are sending the global economy down a path that it will take months or years from which to recover. If we focus solely on the economy, the coronavirus will continue to spread at what likely will be an exponential rate. A middle course of action doesn’t seem very desirable either. It is my view that global leaders have, for the most part, made appropriate decisions to combat the virus first. But we will have to restart the global economy at some point – and that some point will have to be soon. That will be the most difficult challenge that global leaders face next.
I have constructed a new econometric model specifically designed to monitor and forecast the global economy as this current economic crisis unfolds. This new econometric model is based on other econometric models that I designed and have used for many years. You can find some of these earlier models in Book # 6 – Simple and Effective Economic Forecasting in the sister website to this website which is called the Intrinsic Value Wealth Report. The new econometric model has been constructed with some additional tools and methods that I have learned and some that I have developed over the last several years. I will be talking more about this new econometric model in this Commentary over the next few months. My comments and forecasts on the economy and the markets going forward will be based to a significant extent on this new model.
Economic and Investment Highlights
Last Week
The sports business has been brought to a standstill as sporting events have been cancelled or postponed on a global basis. The concert industry has been hit hard as well.
Oil prices hit an 18-year low of $20.09. Oil prices had slid $41 or 67% for the quarter ending in March. They ended the week at $28.34.
Macys, Gap, and other retailers started furloughing tens of thousands of workers last week.
Companies are borrowing record amounts in the investment grade bond markets.
U.S. stocks posted their worst quarter ending March 31st since the financial crisis. The Dow was down 23%; the S&P 500 was down 20% and the Nasdaq was down 14%.
Merger & acquisition (M&A) volume has come to almost a complete standstill. IPO activity is expected to be hampered as well.
The Fed will launch a temporary lending facility for foreign central banks to lessen strains in the currency markets.
Many companies are cutting contributions to employee 401(k) plans.
Factories in the U.S., Europe, and Asia have cut output and jobs at the fastest pace since the 2008 financial crisis.
There was a significant drop in revenues for major car companies in the first quarter. Suppliers to these car companies are being hurt as well.
More states have issued stay-at-home orders.
AMC movie theaters is facing the of risk bankruptcy due to having to close its theaters.
U.S. jobless claims jumped to a record 6.6 million last week.
The U.S. trade deficit narrowed in February as global commerce has slowed.
The Democratic National Convention has been pushed back to August.
The municipal bond market has been hit with selling causing deep discounts in municipal bond prices.
Employers cut more jobs in March than in any month since the 2007-2009 financial crisis in one of the most damaging hits to the labor market in the post-World War II era.
The Wall Street Journal estimates that one-quarter of the U.S. economy has suddenly gone idle. Many economists believe that this is an unprecedented shutdown of commerce that has never before happened on such a wide scale.
British Prime Minister Boris Johnson was hospitalized due to complications from the coronavirus.
Supply-chain financing is emerging as a significant potential risk.
The Dow, the S&P 500, and the Nasdaq all fell for the week. The Dow was down 2.7%; the S&P 500 was down 2.08%; and the Nasdaq was down 1.7%. The 10-year treasury yield ended the week at 0.587%. Gold closed at $1,633.70 for the week. Oil closed at $28.34 for the week.
The Week Ahead
This link takes you to Econoday’s Economic Calendar and Economic Events and Analysis which shows the upcoming economic reporting events scheduled in the week and months ahead.
Summary
Note: The models below may not capture the impact of COVID-19 beyond their impact on GDP source data and relevant economic reports that have already been released. They may not anticipate the impact of COVID-19 on forthcoming economic reports beyond the standard internal dynamics of the models.
Note: The comments that follow are derived from the economic indicators referenced in the Resources section of this newsletter and other sources in this report.
The Aruoba-Diebold-Scotti Business Conditions Index (ALS) had been trending up for several weeks from having dipped in 2019. Recently with the advent of the economic collapse, the index crashed. This is an extremely negative indicator for the economy on a short-term basis.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2020 is 1.3 percent. This reading continues to support the ALS model assessment of a deteriorating short-term economic environment.
The New York Fed Staff Nowcast stands at 1.7% for 2020:Q1 and 0.3% for 2020:Q2.
The Chicago Fed National Activity Index (CFNAI) showed an increase in economic activity in February. The Chicago Fed National Activity Index (CFNAI) was +0.16 in February, up from -0.33 in January.
All told, these short-term economic indicators are a negative analysis for the economy, at least on a short-term basis.
Expectations that stock prices will rise over the next six months is now at 29.7% in a recent AAII Sentiment Survey. The historical average is 38.0% for the survey. 19.0% of the investors in the survey described their short-term outlook as neutral and 51.3% were bearish. Please see the AAII Sentiment Survey for the complete results.
The latest Gross output (GO) reading suggests moderate economic growth as we enter 2020.
On a longer-term basis, the forecasters in the Philadelphia Fed’s Survey of Professional Forecasters (as of February 14, 2019) predict real GDP will grow at an annual rate of 1.7 percent for the first quarter of 2020, 2.1 percent for the second quarter of 2020, 2.0 percent in the third quarter of 2020, 2.1 percent in the fourth quarter of 2020, and 2.2 percent in the first quarter of 2021. On an annual-average over annual-average basis, the forecasters predict real GDP to grow 2.0 percent in 2020, 2.0 percent in 2021, 2.0 percent in 2022 and 2.0 percent in 2023. The forecasters predict the unemployment rate will average 3.6 percent in 2020, 3.6 percent in 2021, 3.7 percent in 2022, and 3.9 percent in 2023.
For a more in-depth review and analysis of the economy, please see our mini-book on economic analysis and forecasting entitled: Simple and Effective Economic Forecasting.
Stock Market Valuations
Our estimates of the market valuations for two stock market indices, the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 (S&P 500), can be found in the file below:
Conclusion
During this time of global flux due to the coronavirus, I am leaving the Conclusion discussion below the same as was posted on March 23, 2020. The March 23, 2020 discussion still adequately reflects my thinking on the current state of affairs.
Reprinted from March 23, 2020
Up until the past week, the economy had been in a stable but somewhat vulnerable state. Nonetheless, it had remained fairly strong. In fact, robust consumer spending and strong labor market conditions had given us confidence that the economy, which had been in its tenth year of expansion, could continue to grow. But we were cautious on this outlook. There were several reasons for our caution. U.S. business growth had been mixed. And global economic growth had been mixed as well. The new coronavirus was becoming a global economic threat, although it was still too early to tell how much of an effect it would ultimately have. Debt is at high levels for consumers, businesses, and government (at all levels of government). Finally, this is an election year that will likely have significant consequences either positively or negatively depending on the outcome of the elections. And of course, it is still too early to tell what the outcome of the elections will be.
In just a few days, the coronavirus’s effect on the economy and the markets went from a ripple to a tsunami. Businesses are shuttering, events are being cancelled or postponed, grocery store shelves are empty, and people are being asked or ordered to stay home. The markets are now deep in bear market territory. The effects on the economy, even given the short time that the economy has been retreating, may be with us for a long time. There is now a much greater risk of a recession, and there has even been some talk of a depression. The government, the Fed, Republicans, and Democrats, and pretty much the entire country, is trying to get the virus under control and is coming up with plans to mitigate the long-term economic effects caused by the virus. But the virus has impacted the economy – in a significant way – in just a short time. How long lasting the effects will be no one can tell right now. The economy has been largely shut down and remains so today. It takes time to restart the economy after a situation such as what is occurring at the present time.
Given these events and the rapidly deteriorating situation, as I said last week, I would caution not to panic. The economy and the markets will get better. The situation is bad – there is no doubt about that – but it will turn around. The real question is when will it turn around? No one knows that at the present time. But it will turn around.
For now, review your investment portfolios. It is highly likely that all or most of your stocks are down. You should not consider selling the bulk of your stocks – only consider selling companies that are not sound companies. But do recognize that as the economy deteriorates, even good companies will be affected.
For stock market value hunters, we believe it is still too early to jump back in. We will be closely monitoring the markets using the many tools and models that we have developed over the years to assess the economy and the markets. We will use our best judgement and thoughts to let you know when we believe things are turning around. The turnaround hasn’t happened yet.
We believe it is important to maintain a long-term view toward investing. But for now, just sit tight. Eventually, this means that you should continue building your investment portfolio using the Cassandra Stock Selection Model to select individual securities that offer growth and value opportunities.
Chart for Review and Thought
Simple and Effective Economic Forecasting Model
Note: The table and chart below have not been updated. However, we believe that a recession is quite likely. In the chart below, the bottom green line shows what a recession could look like.
Notes (GDP Growth Chart):
- See the July 8, 2019 Commentary for an introduction to this model.
- Actual numbers 2007 through 2019; forecasted numbers thereafter.
- Normal GDP growth is typically in the 2% to 3% range.
- A recession is generally defined as two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).
Thought for the Week
“ A handful of people in a live animal market on the other side of the planet have caused more harm to the world than the nuclear arsenals of all of the countries combined that have nuclear weapons .” ~ Anonymous
Announcements
Dr. Wendee spoke at the Investment Club of America’s annual economic summit, called Econosummit, on Sunday March 1, 2020 in Las Vegas.
Dr. Wendee attended the The National Due Diligence Alliance (TNDDA) investment banking conference, which was held March 6-8, 2020 at the Four Seasons Resort in Dallas, Texas. This is a conference held several times throughout the year for investment bankers and registered investment advisers to learn about new opportunities in the Alternative Investment asset classes.
We have been researching the use of crowdsourcing for investment ideas. We will be sending a survey out in the next few weeks to get your input on the economy and the markets; and to get any investment ideas that you would like to share. We will compile this input and distribute the results to you and our other subscribers. We have been testing our crowdsourcing models with students and have been having good success and results.
Dr. Wendee has been researching and writing a new theory of economics known as, The Value Creation Theory of the Economy (also known as, Intrinsinomics). The full paper on Intrinsinomics will be published in the near future.
Finance 3350: Personal Finance-Portfolio & Risk Management– Dr. Wendee started teaching Finance 3350 – Portfolio & Risk Management at California State University, Los Angeles (CSULA) starting January 2020. Dr. Wendee teaches courses in Management and Finance at CSULA.
Business 4970:Strategic Management – Dr. Wendee started teaching Business 4970:Strategic Management at California State University, Los Angeles (CSULA) starting January 2020. Dr. Wendee teaches courses in Management and Finance at CSULA.
Business 218 – Macroeconomics – Dr. Wendee started teaching Business 218 – Macroeconomics at California Baptist University (CBU) starting January 2020. Dr. Wendee teaches courses in Finance and Economics at CBU.
Dr. Wendee presented a paper on his new theory of economics known as, The Value Creation Theory of the Economy (also known as, Intrinsinomics), at the International Leadership Association’s annual global conference which was held in Ottawa, Canada last Fall.
Dr. Wendee is working on a financial planning modeling program which will be available in the near future. The modeling program is designed to assist anyone in creating a financial plan and is customizable for each person’s unique financial planning goals. A working draft of the model is currently in beta test with students. Click this link, schematic, to go to the clickable document under the subheading Financial Planning Process (Draft) in the Intrinsic Value Wealth Report to see a draft of the schematic for the new financial planning process.
Dr. Wendee has been developing an econometric model specifically designed to monitor and forecast the global economy as this current economic crisis unfolds. This new econometric model is based on other econometric models that he has designed and have used for many years. You can find some of these earlier models in Book # 6 – Simple and Effective Economic Forecasting in the sister website to this website which is called the Intrinsic Value Wealth Report. The new econometric model has been constructed with some additional tools and methods that he has learned and some that he has developed over the last several years. He will be talking more about this new econometric model in this Commentary over the next few months. His comments and forecasts on the economy and the markets going forward will be based to a significant extent on this new model.
Intrinsic Value Wealth Creation pyramid
We always conclude our commentary with a discussion of the Intrinsic Value Wealth Creation Pyramid. The Intrinsic Value Wealth Creation Pyramid is designed to show some of the major categories for building wealth. It is the result of many years of study of the wealth building process; experience working with clients who have built considerable wealth; and my own personal experience building wealth. Newsletter subscribers should consult the Intrinsic Value Wealth Creation Pyramid as one of many useful investment tools while considering their investment plans.
The chart in this section is an expanded version of the Intrinsic Value Wealth Creation Pyramid Chart referenced in the Forbes.com article entitled, Nine Of The Best Ways To Build Wealth.
RESOURCES
See our Resources section for links to economic and other resources used in the preparation of this Commentary.