FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
March 24, 2020

IN THIS ISSUE:

1. Reuters Poll: US Recession Odds Now at 80% in 2Q

2. Already in a Recession – Numbers Don’t Show It Yet

3. Government Coronavirus Relief: Done & Yet to Be Done

4. Wellesley Investment Advisors Webinar – Tomorrow 11:00 AM EDT

Overview

A Reuters poll of 40 leading economists conducted last week found a median 80% chance of a recession starting in the 2Q (beginning April 1). I happen to agree with this outlook. If correct, then the questions are: How deep will the recession be, and how long might it last? We can only make educated guesses because the current crisis is different than any we’ve experienced, and no one knows exactly what lies ahead.

As I will argue below, we may very well already be in a recession, and with much of the country in virtual lockdown, it will likely get even worse. There is growing speculation that this could turn into a depression. While we cannot rule anything out at this point, it’s clear the public is panicking, and the coronavirus threat continues to grow by the day. Anything is possible.

What I would like to do today is summarize the actions the government has undertaken in its efforts to minimize the impact of the coronavirus, along with additional actions that are in the works and expected to be implemented just ahead, including a $1+ trillion stimulus package working its way through Congress as this is written.

On a different note, as testing for the coronavirus ramps up significantly just ahead, we all need to understand that the number of Americans who are infected is going to rise significantly as are the number of virus deaths. We can only hope and pray that the numbers will peak in the weeks just ahead, as they reportedly have in China, and begin to trend steadily lower.

Finally, with the major stock indexes down well over 30%, many investors are searching for alternatives to stocks and equity funds. Today, I want to remind you about Wellesley Investment Advisors which invests exclusively in convertible bonds. We will be hosting a live webinar with Wellesley tomorrow (Wednesday) at 11:00 Eastern. You can register HERE. It’s free, of course.

Reuters Poll: US Recession Odds Now at 80% in 2Q

The coronavirus crisis has almost certainly ended the longest US expansion in history and pushed the economy into the start of a recession, according to economists and forecasters polled by Reuters, who gave a median 80% chance of recession this year.

The coronavirus, officially named COVID-19, has spread around the world, crippling global economic activity through lockdowns, business shutdowns, canceled travel, etc., etc. That has triggered financial market panic, ending the longest bull run in stocks in history, including the biggest one-day drop for Wall Street since the 1987 market crash.

The Federal Reserve in an emergency move on Sunday, March 15 slashed interest rates back to near-zero and restarted its asset purchases program, and since then has added hundreds of billions of dollars of liquidity to keep markets functioning.

But that will not be enough to prevent a recession, even though economists for now appear to think the blow will be punishing but temporary, with most expecting at least a modest rebound in the second half of the year.

“We believe that the U.S. economy has fallen into recession, joining the rest of the world, and it is a deep plunge...Although the decline is severe, we believe it will be fairly short-lived,” said Michelle Meyer, US economist at Bank of America/Merrill Lynch, who expects gross domestic product to contract by 12% in the 2Q after growing only 0.5% in the current one. Wow!

While that number probably sounds huge, the majority of economists in the Reuters poll predicted a contraction of 5%-10%. If so, it looks to be the worst recession in decades.

Already in a Recession – Numbers Don’t Show It Yet

Of the 40 economists polled by Reuters, the median estimate for 1Q GDP was 0.7%, compared with 2.1% in the 4Q of last year. We won’t see the first estimate of 1Q GDP until late April. The 0.7% 1Q estimate represents the three months – January, February and March. It is almost certain the economy dipped into negative territory in March.

The textbook definition of a recession is two consecutive quarters of negative GDP. For the economy to meet that definition, we would have to see negative growth in both the 2Q and 3Q. However, most of the economists polled by Reuters expect a potentially strong rebound in the second half of the year.

That view, however, assumes the coronavirus will have mostly or completely run its course by the end of June. While we can hope for that, the fact is we simply do NOT know how long this virus will last or how much more serious it will get.

Government Coronavirus Relief: Done & Yet To Be Done

While we’re still in the early stages of the government’s response to the coronavirus crisis, I thought it would be good to review what lawmakers have done so far and what they’re planning going forward. It’s hard to find such info in one place, so hopefully this will be helpful.

Here are the major steps the government has taken so far.

March 4 – Vaccine research, aid to state governments. The House approved an $8.3 billion bill to drastically ramp-up vaccine research, give funding to state health officials, beef-up prevention programs and more.

March 18 – Sick leave, family leave. The Senate approved a $104 billion bill that would give direct help to many Americans, including 2-week paid sick leave for ill or quarantined workers. Not everyone gets it though: Only people being tested or treated for coronavirus or have been diagnosed with it. Payments will be capped at $511 a day.

The sick leave and family leave provisions are complicated and too detailed to go into in this limited space. More detailed information is widely available online; a good explanation can be found HERE.

President Trump announced late last week that the deadline for filing income tax returns has been extended from April 15 to July 15 with no interest or penalties for filing by the new deadline. Contributions to IRAs were also extended to Jul 15. Earlier this month, the president suspended interest on all outstanding student loans held by the government.

Now let’s look at other relief plans the government is working on.

$2-$2.5 trillion stimulus package – Both the House and the Senate are working on a giant stimulus bill that would provide direct payments to individual Americans and money for industries that have been negatively affected by the coronavirus crisis.

The White House recommended sending $1,000 checks to all adults and $500 checks for children, meaning a family of four would receive $3,000. Senate Republicans want to give $1,200 checks to adults making $75,000 or less and $500 per child.

The question is whether or not such a one-time payment would really stimulate the economy. Put differently, will families who are hunkered down in their homes really get out and spend the money? Or, since they know it might only be a one-time payment, are they more likely to save that money rather than spend it? In any event, this is a huge gamble.

Never mind that we’re already looking at a $1+ trillion budget deficit this year and beyond. But we are to believe it will be no problem to double or even triple the budget deficit – we’re in a crisis, after all. As I will discuss later this week, this will be the ultimate test of America’s “Full Faith and Credit” as we try to sell trillions of dollars in Treasury debt.

I expect some version of this monster stimulus package to pass today or tomorrow. Stocks are sharply higher this morning on anticipation of the stimulus bill’s passage. If the bill somehow fails to pass, look out below!

Bailouts for airlines, hotels, travel industries – Airlines have asked for $50 billion and Trump has expressed a willingness to help them and other travel-related industries. The Senate proposal would give airlines and other affected industries $200 billion in loans. And this may be only the start.

Aid for small businesses – It's the small and neighborhood businesses, along with the travel industry, that might be hit hardest by the slowdown. The Senate proposal would give $350 billion in bridge loans to them which may be forgiven if they meet certain criteria.

Again, these are the major stimulus proposals being seriously discussed. Others are sure to follow. And there are various stimulus measures being undertaken in many states. These unusual actions may sound crazy, but even some fiscal conservatives believe we have no choice given the seriousness of the coronavirus crisis.

Wellesley Investment Advisors Webinar – Tomorrow at 11:00 AM EDT

Tomorrow, March 25 at 11:00 Eastern, we will host a live webinar with Wellesley Investment Advisors. Wellesley invests exclusively in convertible bonds and has an enviable performance record stretching back 25 years. Take a look at Wellesley’s FACT SHEET.

If you are looking for an alternative to stocks, this is one webinar you don’t want to miss. Wellesley will offer a brief presentation on how its convertible bond strategy works and then take live questions. Be sure to register for what will no doubt be a very timely discussion. Even if you can’t attend the live event, register anyway and we’ll send you a recording of it.

As longtime readers know, I have my own money invested with all of the professional money managers we recommend at Halbert Wealth Management. What you would not know is the fact that I have my largest single investment with Wellesley, and I have my kids invested there as well. Given what’s just happened in the equity markets, I urge you to take a serious look at Wellesley now.

Finally, a client sent us a new video yesterday from Steve Hilton, former high level British government advisor and current host of Fox News’ weekly show The Next Revolution. Hilton’s short video entitled “Flatten the [Coronavirus] Curve, Not the Economy” will give you a lot to consider about how the government is responding to the coronavirus crisis. You may or may not agree with everything Hilton says, but he will definitely make you think. Click on the link above to watch it (you can delete the commercials).

Lastly, I want to let you know that our office is open as usual, despite the virus scare. We are here for you, so don’t hesitate to call with any questions, or just to visit. These are definitely some unprecedented times, but we’ll get though them together, as we always do.

Wishing you strength and good health,

Gary D. Halbert

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