The Economic Repercussions of COVID-19

April 2nd, 2020

US Economy: On-Demand Recession.

We are only now beginning to see data indicating a recession in the United States. New unemployment claims have risen to roughly 10 million in the last two weeks as firms have unexpectedly closed to curb COVID spread. Workers in retail and hospitality have experienced the brunt of the consequences thus far (restaurants, hotels, airlines).

US Stocks: Worst month since 2008.

In a rollercoaster ride, the S&P 500 Index plummeted more than 12% in March. The CBOE's VIX Index finished over 60 on 10 consecutive trading days (triple its historical average of 20), when US equities reached a bear market (20 percent decline from the top) and then returned at month's end after Congress passed a $2 trillion relief package.

Foreign Stocks: A difficult road for Europe.

Faced with the global spread of the virus as well as headwinds from a stronger US dollar, non-US shares fell in March, providing little benefit to diversified portfolios. This latest crisis appears to be pitting economically fragile countries like Italy and Spain against Germany and the Netherlands, posing a significant barrier to effective European stimulus.

Fixed Income: Volatility not just for stocks.

Fixed-income markets were roiled by actual creditworthiness concerns as well as a lack of liquidity, with considerably more sellers than buyers. At one time, even high-quality municipal bonds plummeted by more than 10%. The Fed's extension of bond purchases and liquidity programs, as well as fiscal stimulus from the US government, brought the markets back from the brink of collapse.

Real Assets: Oil price at 18-year low.

Oil prices fell by more than 70% as a result of declining global demand and a significant increase in supply as Russia refused to adhere to OPEC output limitations. Daily demand for US gasoline and global jet fuel has decreased by 40% and 60%, respectively, prompting US-Russia-Saudi Arabia production cut talks.

Alternatives: Modest contributors.

Hedge funds were not immune to the COVID-19 sell-off, although there were significant disparities in performance among strategies. Equity long-short funds generally declined more, although macro funds (particularly managed futures strategies) excelled in March, capturing shorter-term asset price patterns.

Our Take

It's now widely assumed that the United States will shortly enter a recession, if it hasn't already, because the economy is basically shut down, with people cooped up at home. Two elements distinguish the current situation from previous ones: (1) the speed with which the slowdown has occurred, and (2) self-imposed social isolation as the cause.

Looking ahead, the main issues are how long the recession will endure and how severe the contraction will be. Early indicators suggest that the virus's immediate ramifications will be severe, as evidenced by record unemployment claims at the end of March, which are expected to worsen from here. The length of the recession is clearly linked to how quickly the virus can be effectively suppressed, which necessitates painful short-term economic sacrifices to preserve public health. Before we can project with confidence, we need to assess what kind of influence social distancing attempts have on the spread.

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