Blow out the candles on the birthday cake! This expansion turned 11 Monday last week. That very day may have signaled the beginning of the end…
Monday, March 9th
March 9th, 2009 marked the turning point from recession to expansion 11 years ago. It is only fitting that the end of the longest expansion potentially began on its birthday. COVID-19 could easily be blamed for Monday where markets tripped a circuit breaker during the first hour of trading (Markets close for 15 minutes at -7.5%, if it continues to -13%, they close for the day). That would not, however, be the full story. A week earlier, OPEC met with Russia to negotiate a 1.5M barrel/day cut in oil output. OPEC and Russia were unable to come to terms. In response, Saudi Arabia has since ramped production by an additional 1M barrels/day. Achieving the exact opposite of price stability. This is an effort to hurt Russian market share. Russia, however, has a lower break-even price on oil than the Saudi’s and certainly lower than the US. The fall in oil prices will likely hurt US shale production more than other countries.
Thursday, March 12th
As if the March 9th Market situation was not bad enough, March 12th was actually worse. The day started much like Monday with a circuit breaker early in the day. This selling led to an eventual bottom at -10%. The selling seemed to be in response to an underwhelming effort from the government to provide stimulus in response to COVID-19. During a press conference Wednesday morning, the administration alluded to measures to provide economic relief for businesses. The measures were to be announced that evening. Rather than economic stimulus, a ban on flights from Europe was announced. The ban may well be warranted, the issue is with expectations that were set and later dissolved.
COVID-19
The coronavirus has spread to about 167,000 people as of the publication of this article and has taken approximately 6,400 lives. As the US prepares for quarantining, Europe has begun to enact mandatory quarantining. The UK has taken a more relaxed approach but seems to be joining the consensus as of late and becoming stricter. Social distancing is quickly become the standard.
Conclusion
It is still unclear if this will spell a recession. The timing of the economic slowdown is interesting with it starting at the end of a quarter; however, it is tough to say what toll increased medical expenses, a lack of consumption, and an uncertain timeline will take on economic growth. Markets are currently pricing in the worst-case scenario and Federal Reserve Board actions are fuel, not for now, but for the recovery. The bounce back may be sharp when it does occur as a cabin fever effect may apply. FRB stimulus is squarely directed at making sure a sharp recovery occurs in due time.
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