Stimulus Package
A $1.3 trillion stimulus package stalled over the weekend. Republicans, Democrats, and the Administration all want a stimulus package but are having difficulty on agreeing on the terms. An agreement is expected this week. The stimulus package is designed to provide aid to individuals; businesses (large and small); and government agencies that are now providing more services and relief due to the virus. A concern that I and other economists have is how this will eventually be paid for. It will be a huge burden on businesses and individuals that have to pay back loans. And the amounts that are not paid back will ultimately have to be shouldered by taxpayers now and in the future. As I have discussed in this and past Commentaries, debt is already at high levels for consumers, businesses, and government (at all levels of government). The addition of more debt could potentially be a drag on the economy for a long time to come.
Economic and Investment Highlights
Last Week
Theatre ticket sales dropped to their lowest levels since 2000 as more people are staying home.
The Dow fell nearly 3000 points, or 12.9%, last Monday (March 16, 2020). The S&P 500 and the Nasdaq both fell around 12%. The 10-year Treasury yield posted its largest one-day drop since 2009, closing at 0.72%, as investors sought the safety of Treasuries. Oil prices fell to a four-year low of $28.70.
Amazon plans to hire an additional 100,000 employees.
Auto manufacturers, including Fiat Chrysler, Peugeot, and VW, are closing factories and scaling back production in Europe. U.S. auto makers agreed to temporarily shut plants in the U.S., Canada, and Mexico.
Companies worldwide are drawing down credit lines.
U.S. airlines are seeking over $50 billion in financial assistance from the government.
The Fed said it would start making loans to U.S. corporations.
The IRS extended the tax filing deadline for 90 days to July 15.
The ECB launched a $819 billion bond-buying program.
Employers are cutting back on labor as the coronavirus affects their businesses. Unemployment claims are rising with an unparalleled number of Americans filing for unemployment.
Fannie Mae and Freddie Mac are suspending foreclosures and evictions.
The Bank of England cut its benchmark rate to a record low and said it would buy $232 billion of U.K. government bonds.
California Governor Newsom put California in a lockdown mode. New York and Illinois also ordered its residents to limit activities.
The market for junk bonds is showing signs of strain, having ballooned to extremely high levels since the 2008 financial crisis.
The U.S. and Mexico agreed to limit travel across their borders.
The Dow, the S&P 500, and the Nasdaq all fell for the week. The Dow was down 17.3%; the S&P 500 was down 14.98%; and the Nasdaq was down 12.6%. The 10-year treasury yield ended the week at 0.932%. Gold closed at $1,484.00 for the week. Oil closed at $22.43 for the week. All three major indexes are down around 30% from their mid-February highs.
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 the last several weeks from having dipped in 2019. Last week, the index crashed (see chart below in Charts for Review and Thought). 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 3.1 percent. This reading continues to support the ALS model assessment of an improving short-term economic environment.
The New York Fed Staff Nowcast stands at 1.6% for 2020:Q1 and 1.1% for 2020:Q2.
The Chicago Fed National Activity Index (CFNAI) showed an increase in economic activity in January. The Chicago Fed National Activity Index (CFNAI) was -0.25 in January, up from -0.51 in December.
All told, these short-term economic indicators are a neutral to 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 the latest 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
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).
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.
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.