Recent weeks have brought sudden and wide-ranging change to the investment landscape as the world grapples with an unexpected health threat. Economic activity has been hobbled by a global pandemic caused by the coronavirus. The normal patterns of people’s lives have been upended by social distancing, stay-at-home orders, travel restrictions and the closing of businesses considered “nonessential.” Federal, state and local governments are responding with uncharacteristic speed and cooperation, and with programs of unprecedented scale. Companies across a broad spectrum of industries are rapidly adjusting to supply critically needed products, while the global healthcare industry is racing to create treatments and an effective vaccine against the virus. Breakthroughs are already being reported, and we believe solutions will be available in a highly accelerated timeframe.
It is hard to overstate the magnitude of what has happened in a relatively short period of time. The rapid spread of coronavirus has resulted in a historic shut-down of the global economy. As of March 30, there were over 775,000 known cases of the illness in 151 countries, with more than 160,000 of the cases located here in the United States. Those figures are going to surge in coming weeks as we ramp up widespread testing for the virus. Travel has come to a standstill, and oil prices have collapsed. Parks, hotels, resorts and sporting arenas have been closed. The California Restaurant Association predicts that up to 30 percent of the state’s 90,000 restaurants may have to shutter for good. Properties of all types anticipate some portion of their tenants are going to have a difficult time paying rents in the upcoming months. Extraordinary social distancing guidelines are expected to remain in place at the national level through April 30, and it is possible that individual states may choose to continue their stay-at-home orders beyond that point. Estimates for when the economy can begin to rev back up are focusing on summer. In the meantime, many businesses have been asked to close their doors, rendering millions of workers either terminated or temporarily furloughed. It is likely our economy is already in a recession.
Individual counties, cities and towns are going to experience a budget squeeze that is likely to persist for at least a couple years. Lower income taxes, sales taxes and property taxes will hit at the same time when the ability to pay promised benefits to retired government employees becomes more difficult due to setbacks in the stock market and extraordinarily low yields on bonds. The pressure to reduce expenses will figure prominently in municipal planning for the remainder of 2020 and probably 2021 as well. The impact on some regions will be amplified by graduated income tax programs, such as in California where roughly half of all income tax receipts come from the top one percent of income earners. Those high income households depend on the stock market and real estate investments for a large portion of their earnings, so the decline in rental income and stock prices will translate directly into a shortfall in future income tax receipts.
The federal government has responded to this crisis in several important areas. First, the Federal Reserve dropped interest rates to zero and began buying hundreds of billions of dollars worth of Treasuries, mortgages, corporate bonds and municipal securities to effectively push an enormous amount of liquidity into the financial system. Second, President Trump declared a national emergency, which frees up funds and removes regulations for medical workers to take whatever steps are needed to add capacity to our hospitals. Along with that action, the government initiated a public/private partnership with companies to supply critically needed products and services, while the FDA is cooperating to fast-track any promising coronavirus testing and treatments through the regulatory process. Third, Congress passed a massive $2 trillion aid package intended to backstop workers and businesses affected by the temporary economic shut-down. It is the largest emergency spending measure in U.S. history. As part of that relief bill, the deadline for filing income taxes has been extended until July 15, and required minimum distributions (RMDs) from IRA and 401(k) accounts have been waived for 2020. In a remarkable display of bipartisan solidarity, the bill passed with overwhelming support in the House and a unanimous vote in the Senate.
The health risk of the coronavirus will diminish with each step along the path of testing, treatment and vaccine. Already, companies have discovered new methods of testing that will accelerate the ability to quickly and reliably identify who is at risk of transmitting the virus. The production of protective gear and respirators has ramped up, and treatments for patients are being identified. Temporary hospitals are being constructed in badly impacted regions, and two military hospital ships have been placed into service. Several promising vaccines are in the works, with expectations that a viable cure for the coronavirus will be available in six to twelve months. The response of our healthcare system has been nothing short of heroic. The ability for businesses to reopen and people to get back to work will improve as the health risk of the virus dissipates.
Capital markets already anticipate that a lot of news this month is going to be bad. We expect a staggering surge in unemployment, and Gross Domestic Product (GDP) figures are going to be messy. Companies will struggle to provide guidance on revenues and earnings for the quarter and probably for the remainder of 2020. The number of coronavirus cases is likely to peak in the coming weeks, especially as the ability to successfully test for the virus becomes more widespread. On a positive note, the actual mortality rate from the illness is probably going to be much lower than earlier estimates once the higher volume of cases can be known.
We are experiencing a profound but temporary disruption in our way of life. The economy and capital markets will recover from this event. Good news is percolating on the healthcare front, and it is only a matter of time before we can put the coronavirus threat behind us. Like other moments of crisis, people are adapting and improvising to these extreme conditions, and some portion of our behavior will likely persist after the crisis abates. There will be new ways of conducting business, new types of social interaction and a redesigned supply chain for critical healthcare products. A lot is being discovered and learned from this experience. If there is one dominant silver lining from the events of recent weeks, it is reaffirming our faith in the resourcefulness and ingenuity of Americans to pull together and respond productively in tough times.
Please stay well, and feel free to contact us if you have any questions.
