On a recent conference call, Baird convened experts from Strategas, a Baird company and leading provider of global macro equity research,to discuss the state of the equity markets and how the economy and political backdrop will shape the months ahead, particularly as the world addresses the COVID-19 pandemic.
Jon Langenfeld, Baird’s Head of Global Equities, led the call. The discussion featured three partners from Strategas, a Baird Company and leading macroeconomic research firm: Nick Bohnsack, Strategas co-founder and head of quantitative research; Don Rissmiller, Strategas co-founder and chief economist; and Dan Clifton, Strategas & Strategas Securities head of policy research.
After opening the call, Langenfeld turned the conversation over to the Strategas team for their remarks on the current macroeconomic and political backdrop. Following are highlights from the discussion.
Are We on the Precipice of a Depression?
The call kicked-off with an overview of the current macroeconomic backdrop. Given March’s dramatic market selloff and the resulting contraction of economic activity, Strategas has fielded numerous questions from clients on whether we’re on the doorstep of the next depression. At this time, Strategas does not believe this is the case.
Bohnsack noted that previous economic depressions resulted from multiple policy errors. “For those of you who have studied the [Great] Depression, one of the key elements that prolonged it was a series of policy mistakes. Effectually, policy makes went zero-for-four. On the monetary policy front, they were tightening, they raised trade barriers, they misdirected fiscal aid, and they increased the regulatory burdens on both banks and industry.”
While the U.S. policy response to the current crisis has been swift and comprehensive, Strategas believes it would be premature to declare an “all-clear” from an economic standpoint. He went on to identify a few key factors that will be essential to building economic momentum, including the containment and cure of the coronavirus, understanding the normalized forward demand curve and determining a terminal level of market activity – which, in turn, will help establish a new baseline of economic activity.
Bohnsack went on to say that as the economy emerges from this turbulent period, it will be critical for companies to further differentiate themselves from their competitors. “We came through a 10 year period where there was participation levels for a lot of businesses that probably should have suffered some greater pangs in the marketplace,” he said. “We do not believe, in the market environment going forward, that you're going to be able to be a marginal operator and keep pace in your industry.”
A Shock to the System
Rissmiller then turned to the economic context for the current environment, briefly reflecting on the early months of the year when COVID-19 was largely contained to China. While there were economic signs of the severity of the situation in China, like a decline in its manufacturing data, the spread of COVID-19 to Europe and other nations marked the beginning of global economic issues. He noted global containment efforts, including economic shutdowns, have given way to not only supply shock, but also a massive demand shock that has spread across global economies.
This turbulence has impacted U.S. employment. Rissmiller noted mounting U.S. initial jobless claims and declining payroll employment and said employment numbers are likely to continue to deteriorate as the labor market shows weakness. He continued, “The big issue is someone’s spending is someone else’s income in the economy, and what we’re doing now is acknowledging the second quarter is going to be weak and looking for areas of [economic] contagion.” He pointed to four potential areas that may experience additional strain in the coming months, including the energy and real estate sectors, emerging market currencies, and state and local budgets.
Rissmiller concluded his comments by saying if employment remains under pressure, there will likely be calls for additional policy responses – perhaps even a 4th or 5th stimulus package in the U.S.
Managing the Policy Response
The call shifted focus to the policy response to the COVID-19 pandemic. Clifton remarked, “Policymakers are really fighting three wars at once. They are trying to prevent as few deaths from taking place as possible, they’re trying to prevent the economy from collapsing, and at the same time, they are trying to figure out how to make sure the U.S. healthcare infrastructure is not overburdened.”
Clifton shifted to policymakers’ response to the economic effects of COVID-19, reflecting on the coupling of a significant – even historic – draw-down in economic data and one of the largest expansions of fiscal and monetary stimulus we’ve ever seen. He walked through key components of the U.S. economic stimulus and added that it is likely to ignite a massive investment in the U.S. healthcare sector. He also said the stimulus sets the framework for a greater government backdrop of the municipal sector.
As for any future stimulus packages, Clifton said Congress is likely to expand existing programs – but the focus is on immediate needs. “Congress is still eyeing a larger stimulus package down the road, one that would involve infrastructure and other types of more structural items,” he said, “but they really believe that with the unemployment rate continuing to increase, they need to be focused on providing that safety net that is associated with people losing their jobs, businesses going out of business, and states trying to manage their liquidity in light of lower tax revenues.”
Langenfeld rejoined the conversation to facilitate a Q&A session for participants on the call. Several asked about the potential negative economic impact of the near-term stimulus. Langenfeld asked Rissmiller to share his views on what to watch for in economic data, acknowledging that the U.S. national debt continues to grow at an unprecedented rate. “I think we're getting to the point where we have to start thinking about the intermediate term because it's pretty obvious that the near-term is going to just be negative data point after negative data point, and that's going to usher in an even more aggressive policy response,” Rissmiller said, adding that Modern Monetary Theory was likely to gain even more momentum in the future. He also pointed to the dollar and interest rates as important indicators.
Multiple call participants sent live-time questions to Langenfeld, asking for the group’s take on the likelihood of a shallow economic period versus a deeper recession. Rissmiller chimed back in to say, “There is not much that’s stopping the economy from being a deep decline because the economy is shut down… once that stops, we can talk about a return, but there’s nothing creating a shallow environment at the moment because even if you provide funds, it’s hard to get them through the economy here at the moment.” Clifton followed on by saying getting employment back would be key to boosting consumer confidence, as would developing a vaccine or effective therapeutic for the coronavirus. “Getting that kind of pharmaceutical solution… would at least allow small businesses owners to feel more confident to hire workers or that workers would be more confident in their consumption. It’s a muddle until we get through that.”
Langenfeld closed the call by thanking the Strategas team and all participants for their time. “Thank you for joining us. From myself and the Baird family, we certainly wish you, your associates, and your family the best during these challenging times.”