Common Cents & Relief on April 3, 2020

This morning, on the daily conference call our investment committee has with client advisors, someone asked when the “SBA loans for payrolls from the stimulus package” would start making an impact on the economy. This is a completely understandable, and undoubtedly common, question. After all, Washington just pledged $2 trillion to keep the engine running, with fully $350 billion earmarked for ‘payroll protection.’ Intuitively, that HAS to be positive, doesn’t it?

The quick answer is: I sure hope so. However, I am scared people are expecting way too much from what many are calling a stimulus package, because it really isn’t one. It is more of a relief package, in that the overriding intent is to mitigate the downside of the recent economic, shall we say, dislocation. A stimulus package would be: “here, take this money and go ADD employees or purchase some stuff NOW, as opposed to later or if at all.” Money to encourage you to not FIRE people? In my book, that isn’t quite the same thing, even if others might disagree with me.

Put another way: a tourniquet to stop blood loss isn’t quite the same as a wellness plan, and prevention isn’t a necessarily a cure.

What I am about to type might be the most important thing I will type this year, and is pretty much what we told the questioner this morning. Here it goes:

“The next 2-4 weeks are incredibly crucial for the markets and the US economy. Investors will be getting a lot of very strange looking, and disastrous, data to absorb. Also, funds from the relief package should start trickling into the economy. If investors can ‘stomach’ the reality of the situation and IF there are limited bottlenecks and other disruptions in the flow of money from Washington, we could very likely salvage 2020 to some acceptable degree. 2Q Gross Domestic Product (GDP) will be ugly, but the economy should respond well in the second half of the year.

The inverse is also true. IF the sheer negativity of the economic releases overwhelms investors (let alone Joe Six Pack) and the flow of funds is botched (it doesn’t matter by whom) things could get uglier than we would like. The markets can and will retest the recent lows. The unemployment rate will continue to climb, and the road to recovery will become that much longer. Frankly, while there is a little margin for error, it isn’t great. In the end, there are no two ways about it: the goal here in April is to mitigate the damage NOT grow the economy. As such, what we currently have is a relief package…not stimulus.”  

Clearly, you could argue what I just wrote is necessarily vague, and I would completely agree with you. Unfortunately, it is impossible to predict the next several months with any sort of clarity or assuredness. From Goldman Sachs to the First People’s Bank of Dogpatch, no one currently in the financial services industry has seen such a sudden stoppage in US economic activity, from coast to coast.

To be sure, 9/11 had an enormous impact on the daily lives of millions, especially in and around NYC, and the overall economy lagged as a result. However, the closure of so-called non-essential businesses across the country? Shelter in place? Cities shut down? States on lockdown? Schools closed? Beaches closed? Roadblocks to keep ‘outsiders’ moving on their merry way through the jurisdiction? Stretches of interstate (in this case I-59…which is thinly traveled in any event) where you can’t see another vehicle in front or in back or on the opposite side of the road from you? Essentially, an entire country frozen in place and time, with the exception of quick trips to the grocery and, increasingly, those liquor stores still open? Nope, and I defy anyone to say otherwise.

Personally, I find it unsettling and as though I am in a weird sort of dystopian novel.

To that end, for the week ending 3/21, some 3.3 million Americans applied for unemployment insurance for the first time. For the week ending 3/28, get this, 6.6 million Americans did. To put those into perspective, the previous all-time weekly high was around 800K, back during the Financial Crisis of 2008.

Interestingly enough, these gaudy numbers won’t fully find their way into the official Unemployment Rate (UR) until NEXT month, for April, due to the way the Bureau of Labor Statistics (BLS) collects data. Even so, the situation had already been deteriorating enough at the start of March to account for 701K official job losses last month and an increase in the UR from 3.5% in February to, officially, 4.4% in March. To put THOSE numbers into perspective, 701K job losses in one month is the highest observation since March 2008. The 0.90% increase in the UR is the largest monthly increase since, get this, 1975…and it could have been worse since the BLS estimated some 1.7 million workers LEFT the workforce last month. So, they aren’t even included in the UR!

To say we are in un-chartered territory would be an understatement.

As I type, it is almost impossible to put an adequate valuation on the stock market. Even IF you had a decent idea what past earnings were, there is almost no way of knowing what they will be moving forward. To that end, the few companies which have recently reported earnings are either extremely vague on guidance (ordinarily negative) or don’t give any at all. Over the next several weeks, as earnings season heats up, investors will find no earnings guidance will be the norm, rather than the exception. The reason is pretty simple: how can the CFO’s office predict earnings when they have no idea when the lockdown(s) will end? Because if it can’t predict that, it can’t predict revenue for the next quarter with any degree of certainty.

This is why the next 2-4 weeks are so crucial. As hard as it may be to believe, the markets are currently trading on hope and psyche, in no particular order. They might rally one day on higher crude oil prices only to sell off the next for the exact same reason. There won’t be any good economic data, in absolute terms, for weeks, if not months, to give the markets any sort of spark. So, it is imperative investors don’t give up the ghost or completely lose heart when seeing the headlines. They will be awful.

Now, the biggest salve for investors is, you guessed it, cold hard cash. When in doubt, shower a discouraged market with money and good things will likely happen. Oh, nothing is a 100% guarantee, but: “when in doubt, buy them out.” This is what the Federal Reserve and the Federal government are trying to do.

To be sure, the $350 billion Payroll Protection Program is a proverbial drop in the bucket, believe it or not. Divide that number by the size of the US economy ($21.73 trillion) and you get 1.61%. So, no one thinks this is a permanent payroll protection scheme, far from it. The intent is to give enough cushion, enough hope if you will, to weather a few weeks or a couple of months (at the most) of decreased economic activity.

IF it, and the remainder of the CARES Act, can give enough cushion and hope, investors will remain engaged, even if only somewhat. They won’t cash in all of their chips, if you will. They will put aside current nebulous valuations for future potential, because the recipe for growth in the not so distant future will be there. In essence, the levee won’t break, the eggs won’t break, and all hell won’t break loose.

The best way of doing this? Doling out cushions and hope? Making sure the cash gets ‘out there’ as quickly and efficiently as possible. No stoppages. No massive bottlenecks. No excuses. No punitive bureaucratic red tape. No business as usual, because it isn’t. None of that.

That might sound like a Herculean task, but it is only if the system makes it thus. If the intent is to get money into the hands of as many people and employers as is possible, things could, would, or should go surprisingly smoothly (or more smoothly than feared). If the intent is political gamesmanship, the consequences could be, well, disappointing.

At this time, I/we are hopeful it is the former. However, that doesn’t change our contention this is NOT a stimulus package. It is relief, a safety net, and the best way of keeping investors and workers engaged. Money might not solve all the world’s problems, but it sometimes makes them easier to handle.

I hope this finds you and your family safe and as happy as you can be.

John Norris

Chief Economist



As always, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our investment committee, are subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the reset of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.