Apr 23, 2020

Axios Markets

Good morning and thanks for all the feedback on yesterday's video! We'll have more coming.

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🎙 "I smell your secret, and I'm not too perfect to ever feel this worthless." - See who said it and why it matters at the bottom.

1 big thing: High unemployment could be here a while

Illustration: Eniola Odetunde/Axios

Unemployment is likely to hit levels not seen since the Great Depression and remain elevated, economists warn, weakening the U.S. economy and making a V-shaped recovery increasingly doubtful.

  • That will be true even if states allow businesses to reopen sooner than expected, as surveys show most Americans aren't ready to go back to their normal routines.

The big picture: Many are looking to China's return from its coronavirus outbreak as a model, but the U.S economy is "a different ball of wax," S&P Global chief U.S. economist Beth Ann Bovino tells Axios.

  • The U.S. is a democracy and far more reliant on the services sector, which provides 80% of American jobs.
  • "China was locked down for a month and it was specific to one region, whereas [in] the U.S., we’re approaching two months and 90% of the population is under lockdown," she adds.
  • "That’s a big difference in terms of the impact on the labor market."

Driving the news: Analysts expect today's initial jobless claims report to show another 4.5 million Americans applied for unemployment benefits last week, taking the total number of filings to more than 26 million in just the past five weeks.

Between the lines: While unprecedented government spending has helped boost sentiment on both Wall Street and Main Street, it is unlikely to accomplish its goal of keeping most workers tied to their employers, Bovino says.

By the numbers: The Small Business Administration recorded 30.2 million small businesses in the U.S. as of 2018. So, even with the expected Paycheck Protection Program funding of $322 billion being added to the initial $350 billion tranche, that would equal only around $22,250 per firm.

  • "That might help some mom and pop stores that only have one part-time worker, but it’s not going to help those companies that have many more," Bovino says.
  • "I just don’t see the incentive for businesses to hold onto workers. And that’s why we’re seeing all these businesses shed jobs."

To wit, of the roughly 60 million Americans employed by a small businesses, only one-third work at companies with 20 employees or less, SBA data show.

  • And PPP loans are only forgiven if 75% of funds are used to cover employee salaries.
  • That leaves little for rent, utilities, supplies and other costs incurred by business owners, who are seeing significantly decreased or zero revenue.

Note: Axios qualified for a loan under the PPP program. More details here.

Bonus chart: Consumers see a brighter future, economists disagree
Data: Morning Consult; Chart: Axios Visuals

Consumer sentiment around the globe is starting to recover, data firm Morning Consult finds, despite economic projections for weakening growth and worse outcomes.

Where it stands: Ratings agency Fitch said Wednesday it expects global GDP to decline by 3.9% this year, "twice as large as the decline" it predicted just weeks ago and "twice as severe as the 2009 recession."

  • Bovino and S&P Global senior U.S. economist Satyam Panday expect U.S. GDP will shrink by 5.2% this year — about four times their March forecast of a 1.3% contraction — and unemployment will hit 19%.
  • "The current recession has likely reduced economic activity by 11.8% peak to trough, which is roughly three times the decline seen during the Great Recession in one-third of the time," they wrote in a recent note to clients.

However, in its latest reading of consumer sentiment, Morning Consult finds respondents are showing increasing optimism about the future, as the number of people who say they expect to be worse off in a year has consistently declined.

  • Sentiment hit an all-time low on April 7, after falling 30% in a matter of days, but has stabilized over the past two weeks.
  • That recovery has came entirely from expectations about the future rather than the present, as the percentage of people who say they are better off financially now than they were 12 months ago and who believe that now is a good time to make a major household purchase remain at all-time lows of 19% and 17%, respectively.
2. Catch up quick

Hubei province, the hub of China's coronavirus outbreak, saw its GDP contract by 39.2% year over year in the first quarter, the largest drop on record for any province since the founding of the People's Republic of China in 1949. (SCMP)

President Trump said he “strongly disagreed" with Georgia Gov. Brian Kemp’s decision to begin reopening parts of the state as soon as Friday. (Politico)

Private equity firm Sycamore Partners filed a lawsuit to scrap its planned takeover of Victoria’s Secret, saying owner L Brands violated portions of the proposed transaction. (WSJ)

3. If the stock market's 2008 performance is a guide, watch out

Data: FactSet; Chart: Naema Ahmed/Axios

The U.S. stock market closely tracked its performance from 2008 following the first major decline of the bear market this year, but has now diverged greatly.

What's happening: Comparing the period of 31 market days starting from Sept. 29, 2008, to the same period beginning March 9 this year, the S&P 500 has fallen by much less than it did, despite expectations for this to be a far more damaging recession.

  • Those dates are effective markers because both were the first time the S&P fell by 5% following respective economic shocks (Lehman bankruptcy and coronavirus), DataTrek Research's Nicholas Colas says in a note to clients.

Why it matters: The big difference was the response of U.S. policymakers.

  • While Congress didn't introduce TARP until October and the Fed didn't take rates to zero or introduce quantitative easing until November, this time around the Fed swung into action well before the first major market crash.
  • "In 2008, the 'it’s going to take longer to fix things than we thought' moment was the November election," Colas says.
  • "Markets understood they would have to wait until 2009 for fiscal stimulus (ARRA passed in Feb 2009). From Election Day to the lows for the year (12 days later) the S&P 500 fell 25.2%."

That moment may still be to come in this recession, Colas warns.

  • "Overlay 2008’s day-by-day experience on to 2020 and you get an 18% decline in the S&P 500 over the next 8 trading sessions."

Watch this space: Bank of America analysts predict the S&P is headed for new lows based on patterns in the VIX, or the stock market's volatility gauge, from 1987, 2002 and 2008.

  • They predict the S&P will top out at around 2,960, about 160 points above its current level, before falling through the March 23 low in the coming weeks.
  • Volatility markets are “underpricing the risk of a secondary market shock," they say in a recent note to clients.
4. "Astronomical" U.S. debt will reshape the Treasury market

Even before expected new stimulus measures are passed, the U.S. government's annual deficit will likely top $4 trillion this year, analysts at BMO Capital Markets write.

Why it matters: "These are astronomical numbers that will reshape the Treasury market for years, if not decades, to come."

By the numbers: BMO estimates the U.S. will need to borrow more than $4.3 trillion, with the bulk of debt being financed as Treasury bonds in the second and third quarters, totaling roughly $3.5 trillion — $1.9 trillion and $1.6 trillion, in each quarter, respectively.

  • The previous quarterly net issuance record was "a comparatively minimal $569.2 billion" in the fourth quarter of 2008.

Between the lines: The Fed is currently equipped to buy around $2.6 trillion through its quantitative easing program, leaving a $1.7 trillion mountain for the market to swallow, BMO analysts say.

What's next: The Bank of America Global Research expects Congress to pass another large package worth up to $1.5 trillion that "extends on provisions in the CARES Act and provides much needed aid to State and Local Governments."

  • Treasury Secretary Steven Mnuchin confirmed in a recent interview that the White House expects much more debt to come: “This is a war, and we need to win this war and we need to spend what it takes to win the war."

Thanks for reading!

Quote: "I smell your secret, and I'm not too perfect to ever feel this worthless."

Why it matters: On April 23, 2016, Beyoncé released one of the greatest albums of all time, "Lemonade." Only on Tidal (with an accompanying film on HBO).

  • My actual favorite line from that album is "How did it come down to this? Going through your call list. I don't wanna lose my pride, but I'ma f**k me up a b**ch." But that seemed a bit aggressive for the top of a morning newsletter about finance.

My top 6 Beyoncé songs:

1. Countdown

2. Party (featuring Andre 3000)

3. Don't Hurt Yourself

4. Formation

5. Partition

6. Ego remix (featuring Kanye West)

What are yours?