Since the advent of Covid-19, we, as a society, have been inundated with information about its spread and resulting effect on the global economy. Data seems to suggest that we are nearing a peak of infection in many of the harder hit areas of the country, although, if you are working at a hospital in the Outer Boroughs of New York or Jersey City, New Jersey it probably doesn’t feel that way. Regardless as to whether you trust the data, the Federal Government is issuing guidelines for reopening our economy and the states will be initiating those in some form. Naturally, our thoughts will be turning from the current state of quarantine and general mitigation, to a somewhat vague notion of what our economy will look like post Covid.
So Where Are We Now?
With respect to the stock market, the Dow Jones Industrial Average has now rallied back as much as 32% from its March 23 bottom of 18,213. Meanwhile, the S&P 500 has rallied 30% from its March 23 lows. This is small consolation when assessed against the approximate 60% drop from our February highs but does give me some sense of optimism as we move towards opening the economy, combined with the potential for increased testing, treatment and a vaccine in the future. There are still considerable headwinds as we look at the many knock-on effects of an economic shutdown. With approximately 20 million Americans out of work and virus mitigation still in effect, the short term ramifications of demand destruction in the economy have been staggering. Industries that rely on bringing people together i.e. Travel, Entertainment, Restaurant etc.. all stand to be severely impacted with the constraints of continued social distancing measures.
Interest rates are near record lows as a result of the Federal Reserve lowering rates combined with investor’s flight to quality in buying US Treasuries. Depending on where you stand financially, and the length of your planning horizon this can mean different things to different people. Low interest rates tend to penalize savers that are in or near retirement, and looking to preserve capital. For those looking to finance a house, car, or other investments, lower interest rates may offer some opportunity.
Where Are We Going?
I don’t think anyone can be certain of the medium to long-term effects of these challenges but, being an eternal optimist, I look for rays of hope in the distance.
First, the magnitude of government stimulus and Federal Reserve intervention will continue to have an effect as the gears of the economy begin to turn. While it’s likely the reopening of the economy will be slow, these stimulus measures will have a multiplier effect on each incremental move forward.
Additionally, the pace of reopening will increase as our ability to test and treat Covid is enhanced. The incentive to accomplish this feat, combined with the financial resources and technology being made available, lead me to believe that we stand to achieve superior results in relatively short order.
My greatest hope is a rise in “animal spirits” with respect to the markets and economy as a whole. Animal Spirits refers to market psychology concept that represents the collective hope and confidence, or fear and pessimism, that guides a population in their economic decisions. It is a powerful force in economics that is difficult to quantify but quite real. I believe that the level trauma and isolation caused by Covid will lead to a commensurate rebound effect on consumer demand. As people are able to get back to work, interact, and heal, increased consumer activity will expand in force. This may be gradual at first, but will accelerate in intensity as we gain more confidence in our future.
Why Am I So Optimistic
Ultimately, I believe in the power of the human spirit in general and the ingenuity and adaptiveness of the American people in particular. We have seen huge swaths of our population lean into each other for support. The bravery of front line caregivers, the resilience of workers in essential businesses, and the willingness of the average person to adapt their lives to quarantine, all give me confidence that our society is strong enough meet the challenge of Covid. We have all been learning hard lessons in what to value in our lives which will be the impetus to forge ahead to what I trust will be a bright future… With lots of hand washing.