Highlighting Notable Events That Grabbed My Attention This Week

Is It Enough?

As I write, Congress is striving to pass the legislation designed to provide relief for individuals and businesses adversely affected by the coronavirus pandemic.

The Senate passed the bill, and the House is expected to pass it soon, though there’s no commitment on the timing. The bill provides cash payments to many households, loans to both small and large businesses, increased unemployment insurance and a bunch of tax changes. Details weren’t released until late last night. I’ll report on them very soon.

Congress estimates the cost of the package at a little over $2 trillion. The markets like this in the short term, but this is a new situation, so we can’t tell how much it will help the economy and the markets.

Bridgewater Associates estimates that the drop in economic activity amounts to a $4 trillion hole in the economy. So, it looks like additional funding will be needed soon if the widespread business activity reductions continue much longer.

The Fed Steps Up

Even before Congress acted, the Federal Reserve and other central banks went all in and made it clear they will do whatever it takes to provide liquidity to the economy and markets.

Last week, I said that the key change during the previous week was that the outlook shifted from one in which people were worried about growth to one in which they were more worried about liquidity. Businesses were having trouble issuing short-term debt, and no cash was flowing into many businesses because of canceled activities and quarantines.

A liquidity crisis, followed by markets seizing up when sellers could not find enough buyers at almost any price, is what made the financial crisis so bad in 2008 and 2009. Central banks need to avoid similar market convulsions this time.

So far, it appears the extreme measures from the central banks are working.

While market prices are highly volatile, and generally have been declining, most markets are functioning. Market participants are able to make trades for most assets without long lags. Even so, trading costs are higher than before the pandemic by several measures. For example, the differences between bid and ask prices for assets have increased. As I discussed last week, many closed-end funds now are trading at much higher discounts to net asset than they were only a few weeks ago.

The markets aren’t without problems, especially for assets that are thinly traded in the best of times. But the problem areas are limited. Unlike in 2008, the broad and most important markets remain liquid and are functioning well.

Several factors account for the difference between now and the financial crisis of 2008-2009.

Banks are in much better shape now than in 2008. Also, markets are less reliant on banks to serve as intermediaries and market-makers. Most importantly, the central bank is willing to provide liquidity for any type of collateral and is buying assets that have large numbers of sellers and few buyers.

The markets have operated fairly smoothly though the trading floors now are closed. Traders and other personnel are operating remotely, and the transition seems to have been smooth.

Most of the media focus on prices, and prices for stocks and commodities, largely are down. Yet, the proper functioning of the markets is more important at times such as this. So far, the markets are operating well for a crisis period and doing better than they did in the financial crisis of 2008-2009.

Market prices are likely to be very volatile as long as there is uncertainty about the extent of the pandemic and how it will affect the economy. For now, though, it appears the markets will be able to handle the volatility and higher trading volumes, with help from the central banks.

There’s a Key Difference This Time

The economy clearly is contracting because of all the economic activity that has been stopped to try to control the spread of the virus. We’re most likely in a recession. Gross domestic product (GDP) could have declined by double-digit percentages in the first quarter and could be worse in the second quarter, which doesn’t start until next week.

A distinguishing feature of this downturn is that it isn’t being led by manufacturing and real estate. Those are the sectors that usually decline first and the most.

The service sector of the economy is less cyclical. Service sector revenue declines when the economy slows, but not nearly as much as in manufacturing. Employment losses in the service sector often are low during recessions while manufacturing and construction jobs tumble. That’s why recessions before the financial crisis became less severe. The service sector is less cyclical, and the service sector’s share of the economy steadily increased.

This time, the service sector is leading the way down. Government officials want to restrict contact between people. The service sector depends largely on contact between individuals, and it is the sector most constrained by the new restrictions.

Restaurants, lodging, travel, entertainment and salons have been targeted by most governments. Social distancing and self-isolation cause other service businesses to close or have all work done remotely.

Most of these businesses aren’t prepared for the losses in revenue they are experiencing. They primarily are small, local businesses that don’t have to deal with these issues or prepare for this situation. They don’t have the resources to stockpile cash or obtain lines of credit.

The major unknowns of this crisis are how these businesses will survive this period in which a large portion of economic activity ceases and how quickly the sector will recover once the crisis passes. Will people become used to dining at home, or will they be in a hurry to frequent restaurants again?

I suspect the turnaround will be fairly quick when it comes. But policymakers need to be aware of the difference in this downturn. In the past, major manufacturing sectors and large businesses were the targets of government aid in bad times. This time, aid has to be channeled to many small businesses, and that’s a harder task.

The Data

Normally, I put the new unemployment claims near the bottom of this section, but this week the unemployment claims are the big news. New claims increased almost 3.3 million, compared to 282,000 the previous week. This jump sets new records but is only the beginning of the unemployment generated by the decline in economic activity.

The service sector slowed sharply in March, according to the PMI Composite Flash Index. The composite for the economy was down to 40.5 from 49.6 in February. The manufacturing sector declined to 49.2 from 50.8. But the services sector declined to 39.1 from 49.4.

This is the first economic report reflecting the pandemic, and the only question before the report was how much the indexes would decline. This is the steepest decline in the measure, which has data back to October 2009, and by far the largest decline in the service sector.

New home sales did well in February. They were down 4.4% from January’s rate, but they were still 14.3% higher than 12 months earlier. While near a high for this cycle, the rate of new home sales is near the historic average. Also, the sales levels for the three previous months were revised higher.

Existing home sales increased 6.5% in February and 7.2% from 12 months ago. This is the eighth straight month that sales increased over 12 months. Inventory of homes for sale still was very low and declined 9.8% over 12 months.

Housing prices were doing well in January, according to the FHFA House Price Index. Prices increased 0.3% for the month and 5.2% over 12 months.

Manufacturing basically was flat in March, according to the Richmond Fed Manufacturing Index. The index was reported at 2, compared to a negative 2 in February. The survey was taken in the first half of March, so the reduced economic activity of the last few weeks isn’t reflected in it.

Manufacturing seemed to have a last hurrah in February before the pandemic restrictions hit. Headline durable goods orders increased 1.2% for the month.

But the headline number was misleading. Excluding transportation, orders declined 0.6%. More importantly, core capital goods decreased 0.8% in February, while January’s increase was revised down to 1.0%. Core capital goods are a measure of business investment in plant and equipment.

The third and final estimate of GDP for the fourth quarter of 2019 was released. Few elements were changed from the previous estimate, and overall growth stayed at an annualized 2.1%. The report is largely irrelevant now, because the economy has changed a lot.

The Markets

The S&P 500 rose 3.46% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 6.99%. The Russell 2000 increased 10.42%. The All-Country World Index (excluding U.S. stocks) added 11.49%. Emerging market equities edged up 10.29%.

Long-term treasuries rose 12.60% for the week. Investment-grade bonds increased 10.92%. Treasury Inflation-Protected Securities (TIPS) added 9.59%. High-yield bonds gained 0.66%.

On the currency front, the U.S. dollar declined 0.18%.

Energy-based commodities increased 5.73%. Broader-based commodities rose 8.14%, while gold declined 7.64%.

Bob’s News & Updates

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book on Amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.