What a year last week was!
Last week was a tumultuous one. Oil prices cratered on Monday, and we spent the rest of the week calming markets like a skittish horse. We received additional stimulus for small businesses to the tune of $484 billion. Unemployment numbers were horrific (again), bringing the total new unemployment claims to 26 million. Governors continued to issue conflicting edits as to when states will reopen. All that was done by Thursday and the market was quiet on Friday as we ended the week down for the first time in three weeks after recovering nearly half of recent deep losses.
Oil had a heck of a week. Its wild ride on Monday took the near-term futures contract down nearly 300%, meaning that if you wanted to take physical delivery of a barrel of oil when your futures contract came due on Tuesday, the owner of that barrel would not only give you the oil for zero dollars but would also have to give you about $37 in cash. This extraordinary set of circumstances has never happened before, and it may not happen ever again.
Oil was already on shaky ground as the economies of the world shut down. With companies not working and people not traveling, oil consumption decreased while inventories were bloated because the Saudi oil producers were trying to put U.S. frackers and drillers out of business. Then came the disastrous price war with Russia that saw inventories explode as prices declined further. Not even the historic OPEC agreement to cut oil production came in time to prevent what we saw last Monday.
Here’s my take: No, you are not going to get paid to fill your car with gas. Gas prices are low ($1.91 per gallon around the country) with some states seeing prices below $1 per gallon, but no one is driving, so its doubtful cheap gas prices will stick around as the economy rebounds and industry and individuals begin using more oil. The U.S. drillers and frackers will stay idle until it makes economic sense for them to start up again, and the OPEC production cuts will still be in place. Oil isn’t going anywhere, and before we know it, we’ll be paying a dollar more than we are now for a gallon of gas and wondering why we didn’t hoard some gas when we had the chance. (The same discussion can be had over toilet paper.)
Bad news galore, but much of it was expected
After the fourth week of outrageous numbers, unemployment claims surpassed 26 million over the past month. The unemployment reading for April will probably be 15% to 20%, eclipsing the Great Recession and looking more like the Great Depression of the 1930s. Back then, the government didn’t do much or did the completely wrong things. By contrast, our government has done a ton to provide support, and once we get going again, we should be back on track. PMI and consumer sentiment both looked really weak, but all of this bad data is to be expected and is a direct manifestation of the shutdown. WE ARE SHUT DOWN BECAUSE OF THE CORONAVIRUS AND HOPE TO REOPEN SOON!
Is it any surprise that 50 governors and one president have about 51 different ideas of how we should get things going again? To be fair, not all governors issued statewide stay-at-home orders; some didn’t declare any orders, others mostly did and still, others went full beast mode. That means the situation of every state will be different and this reopening will be a clunky affair.
We had more protests in some states surrounding stay-at-home orders, with protesters demanding the respective governors reopen the state’s economy. There’s been encouraging data on infections, but not everyone views the data the same way, and there is tension between those who want to open things up quickly and those who want to take more time. The only easy thing was telling everyone we needed to shut down our businesses and schools and have people stay home and social distance. That ask was simple, and the execution was pretty simple as well.
The difficult thing going forward: How do you restart the economy in a safe and responsible manner, and who will define what safe and responsible is? How does this impact the market and the economy as we move forward? We have been convinced the cure to this market and the economic rebound was going to be a quick reopening. Companies would begin providing goods and services again, the unemployed would go back to their jobs, and life would return to normal.
That’s all well and good, but the reality is you have 50 states doing 50 different things at 50 different speeds. Yes, some states are coordinating efforts to reopen on a regional basis, which could be good (if they are quick about it) or bad (if they go too slowly). We are waiting to see how this grand experiment plays out. Markets panicked and sold off initially in February and March but have climbed about halfway back. Without a coordinated, comprehensive, safe, coherent, and quick plan to get us back up and running, we risk wallowing at these levels for months.
COMING THIS WEEK
- States will continue to reopen in fits and starts. As I said above, I don’t feel it will be a smooth process; more likely, it will be a messy affair.
- New unemployment claims should hopefully continue to decline.
- Initial first-quarter U.S. GDP will be announced on Wednesday, the Federal Reserve will hold its April meeting, and while there’s not much more they can do on interest rates, Chairman Jerome Powell might surprise us with a new monetary trick he might have up his sleeve.