A week into June, it feels as though we're at the end of the second inning of the coronavirus pandemic, with the caveat that it could easily go into extra innings. What are our main observations over the past two months regarding both the economy and the financial markets?

The economy

Employment plummeted and economic activity contracted at record speed as a result of the public health measures taken to blunt the spread of the COVID-19 illness, measures such as the closure of businesses and social distancing. Though much economic data is measured too infrequently to properly reflect the fast-paced changes that occurred and are occurring, two exceptions are the weekly new claims and ongoing claims from the the US unemployment insurance (UI) program.

From the chart of the UI claims we see first that the rapid rise in unemployment was unprecedented, as over six million Americans per week filed for UI in late March and early April. Secondly, new claims steadily diminished since March but even now remain several times higher than the 600,000 or so that would characterize a normal recession. Finally, even in the early days of the pandemic, the number of Americans on UI generally didn't rise as quickly as the prior weeks' new UI claims.

As parts of the US economy began to reopen in May, the last item became more pronounced and in the week ending May 16, four million Americans stopped receiving UI benefits altogether (even though their benefits wouldn't have yet expired). Combined with a May employment report that showed 2.5 million net new jobs created in the May 12 pay period (compared to the 20 million lost the prior month), and along with increases in other measures such as gasoline production and driving direction searches on Apple's mobile map program, it appears likely that US and global economic activity has hit bottom and is starting to turn upwards.

Financial markets

In our April 9th update, we wrote that "In nearly all recessions, stock and corporate bond prices decline well before the measured economic downturn. They also turn upwards long before the economy has recovered, and often even before the economy begins to recover." These words proved prescient more quickly than even we'd have guessed.

Stock prices, as represented by the S&P 500 index of the 500 largest American companies, hit their lowest point so far this year on March 23, not even two weeks after the social distancing measures began in earnest. Since then, daily stock price changes became much less choppy or volatile, as the emotional extremes of the pandemic's start began to dissipate. Stock prices generally trended upwards and by June 5, though green shoots had only begun to appear in the economy, the S&P 500 price had already recovered to only one percent below its level at the start of the year. Canadian and overseas companies fared slightly worse but their share prices had also recovered significantly and were only about six to eight percent lower than at the start of the year.

The recovery was no less pronounced - and no less important - for corporate bonds, which also hit their trough in mid-March. Investment grade bonds recovered more than all their lost ground by early June, whereas high-yield or "junk" bond prices also recovered strongly but remained about three percent below their level at the start of the year.

The corporate bond market unlocked very quickly due largely to an alphabet-soup of support programs announced in early March by the  American (the Federal Reserve) and Canadian (the Bank of Canada) central banks. These programs were designed to support the financial sector and also prevent the credit markets from "locking up" and adding to the economic malaise during the pandemic shutdown. To reuse an analogy, the derailment of the first rail car was unavoidable due to the pandemic's rapid onset. By keeping the financial system solvent, the other rail cars remained on the track so that the economy didn't contract any further than necessary, and so that a faster economic restart was possible.

Where to next

Stock prices up, corporate bonds prices up, the economy probably past its trough - all our troubles are in the past, correct?

Not necessarily. The COVID pandemic has definitely subsided significantly since the public health restrictions were enacted, but the virus hasn't been eradicated and though much promising research is ongoing to develop a vaccine, one may not arrive for many months - if ever. In short, there's currently no obvious solution which will allow society and the economy to completely reopen. The first reopening steps have been taken across many parts of the world, but they will remain quite tentative for the foreseeable future.

However, it seems that careful reopening can be accommodated without a massive resurgence in new cases. Even if new cases rise after reopening, the element of surprise, which caused financial markets in March to shake furiously, will be largely absent. It had been a century since North America last experienced a pandemic, the 1918-19 Spanish Influenza, whereas we're now all experienced veterans! While we can't say with certainty how the next several months will play out, it seems likely that public health concerns will be balanced against greater concern for the economy, and society now has a better understanding of the tradeoffs involved with both.

To investors now navigating the waters of an uncertain economic and financial environment, we continue to offer the tested and proven advice to first set an investment plan, a plan which acknowledges that there will be both bad times and good, and to then stick with that plan throughout.