Talking to Clients About the Economy, Markets, and Government Interventions

Mar 27, 2020 / By Charles Sherry, MSc
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Advisor TalkingPoints: Prepare for client conversations with this week’s considered analysis of the economy and markets in these unusual times.

Markets are reflecting a tremendous amount of fear. We’ve watched the quickest peak to correction, peak to bear market, and peak to 30% decline ever (22 trading days to fall 30% from the high reached February 19).

We know what’s fueling the fear—the enormous amount of economic uncertainty tied to COVID-19 and how it will affect earnings, the economic ramifications from lockdowns that keep us from patronizing businesses, and forced government shutdowns. Yes, I get it. There is a pandemic and the need to slow the transmission of the virus.

“This organized ‘throttling down’” of activity, as St. Louis Fed President James Bullard frames it, has forced policy makers to scramble and create innovative ways to blunt the severe economic impact.

The Fed announced several measures designed to support the Treasuries, commercial paper, money funds and municipals.

The Fed said it will begin buying corporate debt through a Primary Market Corporate Credit Facility for new bond and loan issuances, helping to keep credit flowing to large businesses, and a Secondary Market Corporate Credit Facility to provide liquidity for outstanding corporate bonds. It will focus on ETFs and investment-grade debt.

The Fed has announced what amounts to QE infinity, as it has pledged to “continue to purchase Treasury securities and agency mortgage-backed securities in the amounts needed (my emphasis).” It will also buy agency commercial mortgage-backed securities.

It’s unprecedented, but I see three primary goals.

First, stay ahead of the curve and prevent a systemic event that freezes credit markets and further roils equity markets and the economy. Second, keep credit flowing. And third, lay the foundation for a robust economic recovery.

While stresses in credit markets have surfaced, so far, we’re nowhere near what was seen in the 2008 financial crisis.

Lending to Main Street

The Senate also passed a $2 trillion stimulus package early Thursday morning—(see the details.)

As it awaits funding, the Fed is also set to establish a Main Street Business Lending Program (MSBLP) to support lending to eligible small-and-medium-sized businesses, complementing efforts by the Small Business Administration.

While details are sparse, the MSBLP is critical and must function efficiently, as it’s designed to provide cash to companies that keep employees on the payroll or pay for sick time. The virus will peak, and lending support during the economic crisis is essential or many small businesses could disappear.

Free markets vs. government intervention

The short-term economic impact will be enormous. Never have we seen such widespread closures in the U.S. economy.

I understand that massive intervention by the Fed and the federal government is inconsistent with free markets.

However, we are facing unprecedented challenges today. Many are complying with government mandates to stay at home. Some of us have clients who are simply following government-ordered shutdowns designed to slow or prevent the spread of the disease.

Therefore, in my view, it is incumbent on the government to support firms and employees who are simply following government edicts.

U.S. & global markets

1. Weekly first-time claims skyrocket

  • In the first tangible sign of COVID-19’s hit to the economy, weekly jobless claims surged to 3.28 million from 282k, easily beating the forecast of about 2.5 million—see Figure 1.
  • It exceeds the 1982 record of 695,000.
    • Claims surged in most states, but those hardest hit by the virus had the biggest jump.
    • The weekly number would have been worse had it not been for state computers that were overloaded by first-time filers.
Figure 1: A New Record

Source: St. Louis Federal Reserve NBER.
Shaded areas mark recessions 3/21/2020.

  • Looking beyond the shock, as businesses begin to reopen and recall furloughed workers, first-time claims will begin to recede, hopefully, fairly quickly.

2. PMI implosion

  • Markit Economics posts a monthly survey of purchasing managers, which is designed to foreshadow economic trends much the way the closely followed ISM Mfg and Non-Mfg Indexes do.
  • The U.S. took a big hit in March, with the service sector bearing the brunt of the economic downturn.
  • The IHS Markit Flash U.S. Composite PMI Output Index fell to 40.5 in March, down from 49.6 in February (Note: the February ISM report was much better)—see Figure 2.
    • Flash U.S. Services Business Activity Index fell to 39.1 in March from 49.4 in February, a new series low.
    • The Flash U.S. Manufacturing PMI fell to 49.2 from 50.7 in February, a 127-month low.
    • At 49.7, it’s very encouraging as manufacturing is holding up, at least so far. I suspect that falling exports and cutbacks in energy capex will soon hamper manufacturers.
Figure 2: IHS Markit Composite PMI and U.S. GDP

Source: IHS Markit Data collected Mar 12-23, US BEA
A reading of 50 would suggest activity is neither expanding nor contracting.

Per IHS Markit’s headline: COVID-19 outbreak leads to largest collapse in eurozone business activity ever recorded

Things are much worse in the eurozone

Key highlights

  • Flash Eurozone PMI Composite Output Index fell to 31.4 from 51.6 in February, a record low (since July 1998).
  • Flash Eurozone Services PMI Activity Index fell to 28.4 from 52.6 in February, a record low (since July 1998).
  • Flash Eurozone Manufacturing PMI fell to 44.8 from 49.2 in February, a 92-month low.
Figure 3: IHS Markit Eurozone Flash PMI and GDP

Source: IHS Markit Data collected Mar 12–23, Eurostat
A reading of 50 would suggest activity is neither expanding nor contracting.

  • The shuttering of various sectors in the U.S. and European economies has strangled activity.

3. An ugly Q2

  • St. Louis Fed President Bullard sees GDP falling by as much as 30% in Q2. Morgan Stanley is at 30.1%.
  • But the range is enormous, with Wells Fargo at 3.3% and IHS at 5.4%.
  • Nine other firms range between 10 and 17.7%.
  • Two others are at 20 and 24%, respectively.
  • It’s an incredible range, and the uncertainty helps explain the speed of the market’s decline.

4. Recovery: the signal-to-noise ratio

  • We want to see new cases in the U.S. slow, including New York, which has been hard hit.
Figure 4: Daily New Cases in the U.S.

Source: Worldometer 3/25/2020 Noon ET

Figure 5: Total Cases in the U.S. (Logarithmic Scale)

Source: Worldometer 3/25/2020 Noon ET

  • Greater certainty regarding fiscal and monetary stimulus is needed and appears to be occurring. It’s helped stabilize markets this week.
  • A greater degree of clarity as to how big a hit the U.S. economy will take. A recession is priced in by investors. We don’t know how deep or long.
  • The removal of lockdown restrictions, when health and safety dictate, will likely help sentiment.
    • Data are just beginning to trickle in.
    • The unknown remains a factor as there will likely be residual concerns over the virus.

5. The Senate passes a $2 trillion stimulus bill; the House is expected to follow

  • The bill is called the Coronavirus Aid, Relief, and Economic Security Act or CARES Act. Read more about the details of the stimulus bill here.
  • Under the direction of the Fed, the Main Street Business Lending Program is a key pillar of the government’s program to limit damage. But it must be administered in a fast and efficient manner.
  • However,
    • Will small business owners access these lifelines?
    • How many bureaucratic hoops will they need to jump through?
    • How can apps be quickly processed?
    • How fast can cash be infused into companies that can’t meet payroll?
    • What about controls that ensure loans are used as intended?
  • If it works as envisioned, it will provide an enormous amount of firepower to firms as we await a reopening of major swaths of the economy.

My heroes—we’re all in this together

When someone asks me who my heroes are, first responders or those who serve in the military come to mind.

Today, let’s include the “ordinary folks” who are under tremendous pressures, risking infection and keeping shelves stocked for all of us.

Nurses and doctors caring for those who are sick, truckers that keep the stores supplied with necessities, delivery drivers, grocery store workers, and so many more who provide essential services.

I’m grateful for their commitment to serve the public. God bless them, God protect them.

Charles Sherry, MSc, is a financial writer who is passionate about delving deep into the markets and leveraging communication to improve the client experience. He has almost 25 years of industry experience, including six years authoring the highly-rated Schwab Market Update. Charles is a writer and speaker who works primarily with financial advisors, providing timely content for newsletters, blogs and social media. The goal: bolster client engagement and increase advisor visibility. Learn more at or contact him at

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