28 Sep COVID-19 Shutdowns

Widespread Shutdowns

In response to the rapidly growing number of COVID‐19 infections in the U.S., many states and municipalities issued orders shuttering non‐essential businesses and restricting unnecessary movement and gatherings of more than a small number of people. Most of these orders are expected to remain in effect for at least 4‐6 weeks, if not for several months.

Almost Certain Recession

10‐year Treasury yields have fallen to 0.72% and touched even lower records in recent days aŌer being as high as 1.6% a month ago. U.S. equities have fallen by close to 30% over the past month with over two thirds of that move coming in the past two weeks. Investment grade corporate credit spreads have widened by 122 bps in the last two weeks. These moves indicate that the shutdowns are expected to have a severely negative impact on growth and the viability of many businesses in the U.S..

What Now?

The shutdown orders and restrictions combined with people seeking to reduce contact on their own will cause a slowdown in the economy, and one that will have potentially devastating impacts on many businesses and their employees. The most immediate question will be how long it is before restrictions are eased and how quickly businesses can return to some minimum level of profitability. If it takes more than a month or two for this to happen then there will be a lasting negative impact on employment and incomes as well as a surge in defaults. Policymakers are very unlikely to sit idly by while the global economy slips into a deep recession. Both monetary and fiscal authorities are almost certainly going to implement significant stimulus measures. Unfortunately, the major central banks never really unwound their last round of extraordinary measures and most developed naƟon governments and China are already in a fiscally precarious position. The long term negative impacts of ramping up fiscal and monetary stimulus in this situation will make a return to trendline growth even more difficult to achieve.