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Markets Fall, But Don’t Blame Powell

Stocks fell sharply today with the S&P500 losing 5.9% while rates on 10-year Treasuries dropped to 0.67%. It was another one of those unpleasant days that we haven’t seen in a long time. There was some loose talk that the sell-off was triggered by Federal Reserve Chair Jerome Powell’s dour outlook at yesterday’s pressure conference. I don’t find that explanation compelling.

Realistically, Powell said nothing that should have been unexpected. If anything, the Fed’s forecasts as implied by the SEP were arguably optimistic. Returning unemployment to 6.5% in 18 months would not be a terrible outcome given the  rapid jump to double-digit numbers. Moreover, Powell expressed optimism that unemployment rates could return eventually to pre-Covid levels which would imply minimal fundamental damage to the labor market in the long run. And he clearly intends to maintain that outcome as a primary policy goal. No one could possibly have expected Powell to rally around a V-shaped recovery. This was about as good as it gets.

A better story is this:

And this:

The sharp run-up in equity prices in recent weeks was vulnerable to a change in sentiment. The most likely triggers would be a lack of faith that another fiscal support package was on the way or renewed concerns about that pesky Covid-19 pandemic. The latter seems to be driving sentiment today as the virus hotspots appear in previously less-impacted areas. Via the Wall Street Journal:

Some U.S. states that were largely spared during the early days of the Covid-19 pandemic are now seeing record hospitalizations, causing some experts to fear that loosened restrictions and the approach of summer led many Americans to begin letting down their guard.

The post-Memorial Day outbreaks in states come roughly a month after stay-at-home orders were lifted. Experts urged people to continue to take the virus seriously and not take increased freedom as permission to stop wearing masks or resume gathering in large groups.

This is not entirely unexpected but unfortunate none-the-less. Houston is getting ready to pull the trigger on renewed lockdowns. Via Bloomberg:

Houston-area officials are “getting close” to reimposing stay-at-home orders and are prepared to reopen a Covid-19 hospital established but never used at a football stadium as virus cases expand in the fourth-largest U.S. city.

The announcement by Harris County Judge Lina Hidalgo and Houston Mayor Sylvester Turner on Thursday came a day after the Lone Star state recorded its highest one-day tally of new cases since the pandemic emerged.

In my own state of Oregon, via the Oregonian:

Officials at the Oregon Health Authority say they do not know how many contact tracers are working to prevent the spread of coronavirus four weeks after Gov. Kate Brown allowed most counties to reopen.

State officials in April calculated that at least 631 contact tracers would be needed to identify and speak to close contacts of people with identified infections.

The state used that figure to create county-level staffing targets. County officials submitted reopening plans. And Brown on May 15 allowed some counties to move forward despite missing staffing benchmarks, so long as local officials said they could beef up the workforce if needed.

But one month later, as identified daily infections reach an all-time high statewide, the Oregon Health Authority cannot provide basic statistics about how many tracers are currently working.

And we are hiding the data that lets us evaluate the ability to reopen:

The Oregon Health Authority on Wednesday refused to release key statistics used to help justify and monitor Oregon counties allowed to reopen during the coronavirus pandemic.

I suspect we are going to see rolling lockdowns going forward. I don’t think we have to political will to enact another virtually nationwide shutdown, nor can we muster the social responsibility to wear masks or avoid large gatherings. Nor did we have the public health infrastructure in place to adequately contain the virus. What we are going to do is limp along with half measures while a lot of people die.

Likewise, the economic recovery will limp along in this situation. Even a slow simmer of infections will keep the populace wary of leaving their homes and engaging in normal economic activity.

This has really always been the most likely outcome. What will that economy look like? Probably bifurcated, with some segments learning to grow around the virus while other will have a hard time doing so within their existing business models – a lot of leisure and hospitality, for example – and will repeatedly push for a more rapid reopening and be a recurring source for new infections.

The only good news about today’s setback on Wall Street is that every drop in the Dow corresponds to a bigger number in the next fiscal package. In that case, Congress continues to help put a floor under the Main Street, the Fed continues to put a floor under Wall Street, and on net the economy moves forward. Moves forward choppily with unequal outcomes along a suboptimal path, but still forward.

There is a long road still ahead. Still, perhaps there is some room for optimism. Moderna is beginning final testing of a potential vaccine. Others will follow.

Bottom Line: A recovery is coming, but it is not V-shaped.