The COVID-19 outbreak has jarred an 11-year bull market into a sudden downturn and what looks to be a recession. What is more startling is that we are now anticipating a record number of unemployment claims hitting the system that even dwarfs what was seen during the Great Depression. Various reports show that unemployment claims will surge by more than two million in what amounts to be a relatively short period of time (one or two weeks). The sudden closure of schools, restaurants, retail locations, and essentially non-essential functions has ground the economy to a halt. Even the Great Recession did not hit with such sudden force. The Dow was inching close to 30,000 when now it is below 20,000. This incredible drop is what happens when you shut down an economy that is built for consumption yet there is limited consuming when we need to be practicing social distancing.

The Surge

Like most Black Swan events this came with little fanfare but is now taking the country over. COVID-19 is incredibly infectious and has an incubation period that usually lingers with carriers being asymptomatic. So this makes the infection travel quickly. In China, once the government got serious they essentially shut down an entire area of Hubei province (which includes Wuhan) that had 60 million people. Many in the US heard the story but thought “this will not happen here” but here we are and now many in the US have orders to stay at home.

This change has crushed the economy and now the question is, how bad will things get with this virus? For one thing, the surge in unemployment claims has crashed state websites and is something we have never seen in terms of the speed and severity:

Take a look at the chart above. This chart goes back to 1980 (40 years) and you see that even during the Great Recession which was intense, the ramp up was more gradual. This is literally off the charts and will have a dramatic ripple effect in many industries:

-Travel: Airlines have been crushed and cruise lines are teetering

-Hotels and tourism: Many areas are essentially shut down and with people having less discretionary income, they are not spending money especially on traveling

-Finance: When essentials are deemed of importance (eggs, toilet paper, etc.) many companies that were built on speculation will crater over night

The level of unemployment claims coming through state systems is disturbing. In California tens of thousands of claims are coming through the system (one day last week had over 80,000 claims). This is troubling especially if the ‘stay at home’ orders go on for months versus a few weeks.

Overall this is going to lead to a massive contraction and the reason the market is tanking so hard is that very few had this on their radar. Even many of those that were tracking the spread of the virus did not forecast anything like this. Now let us hope this virus is contained with all of the actions we are taking.



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