ANALYSIS: FINANCE AND ECONOMICS /

By Rafaela Prifti/

This article delves into understanding the gap between market and economic data, based on comments of financial and policy analysts as well as input from business and finance professionals of VATRA community. While everyone seems to be in agreement about staying cautiously optimistic, it is prudent to prepare for certain variables and a lasting impact.    

In the early stages of the outbreak, stocks tumbled amid fears of the virus spread and its potential impact on the global economy. During that time, at several points, trading was halted to rein in the chaos. In the following weeks, the markets bounced, for the most part, while the economy is in decline and 38.6 million Americans have filed for jobless claims in nine weeks. The stock market isn’t the economy, but it is worth-looking into the explanations that might be driving its performance in a relatively loose relation with the grim reality of the coronavirus pandemic. The IRS and Treasury Department announced that about 4 million stimulus payments will be sent to Americans on prepaid debit cards instead of as paper checks. The Federal Reserve and, to some extent Congress have taken extraordinary measures to pump money into the economy and prop up markets. The amount of spending up to date amounts to about one-third of GDP in a very short period of time. This is considered to be the main driver of the market’s rebound and a factor that keeps the investors’ nerves in check. 

Fed’s Monetary Policy

The Fed is the nation’s monetary policy authority. On Tuesday, the Head of the US Central Bank, Jerome Powell, appeared before the Senate Banking, Housing and Urban Committee urging Congress for more fiscal relief. The Chair of Federal Reserve assured lawmakers that the central bank is committed to using its “full range of tools” to support the economy as long as needed. The Fed plans to buy both investment-grade and high-yield corporate bonds, which means that the Fed is promising to buy corporate debt that’s at low risk for default, and debt that is not. These maneuvers have injected an enormous amount of liquidity in the market and restored faith of both private corporate bond buyers and equity investors that the central bank is there to back them up. The Fed still has not spent money on its corporate bonds program. The enormous amount of liquidity has allowed the market to be more optimistic than the health experts’ predictions for the pandemic. During the last global financial crisis, the Federal Reserve provided extraordinary policy tools never used before in effect “decoupling the stock market’s fortunes from that of the economy,” say the experts. The same measures were employed this time around. In the modern bailout era, between the Fed and the federal government, there’s reason for equity investors to feel okay. 

The corporate America woes in the short term are evident. To illustrate the point, Ervin Dine, Deputy Chairman of the Pan-Albanian Federation of America VATRA, speaking in his capacity as the NYC District Manager at his company said: “This last quarter was a severe decline. Just to give you an idea, my company, the largest transportation solutions provider in the world, just on this quarter alone is eighty percent behind last year’s revenue.” Mr. Dine considered that the present financial and economic indicators would need some adjustments in the long term. “Markets did stabilize due to the stimulus package and assistance provided to both companies and individuals. However, if the stay at home orders continue for much longer, it could mean an even further decline. Yes, there will be investors that will be able to take advantage of the new reality, but with unemployment at the rate that it is, confidence may slip further. I firmly believe that the administration has a plan to get the economy back on track. I do think however that it will take some time for the new post COVID-19 normal. Companies and employees will have to adjust to a new way of doing business,” he said. The Fed’s actions solve the immediate liquidity problem. They keep companies afloat but don’t solve whether a business is going to be viable and therefore able to pay back the debt in the long run. Many companies, especially small businesses, have struggled to get loans. A new Congressional Oversight Commission report found that the Treasure Department has barely spent any of the $500 billion set aside to help businesses and local governments. In an interview with the English Editor of Dielli, President of Pan-Albanian Federation of America VATRA, Elmi Berisha projected optimism that “out of the economic downturn, new opportunities will arise.” In his view, “The Albanian American business community operates mainly in three area: gastronomy, construction and real estate.” Mr. Berisha, who has received US College education in Business and Management, said: “The restaurant industry has been hit hard. Those in the business who will adapt, will also be able to succeed. The construction contractors and companies that are subject to rules and regulations pertaining to the procurement of goods, services, insurances and so on, have to contend with those factors. Thirdly, the housing market has seen sales drop and given the numbers now it could be headed toward a downturn. Also the supply and demand for retail space may change significantly while the economic fallout of the coronavirus pandemic takes hold.” Yet, Vatra’s President expressed optimism in the revival and the prevailing spirit of the Albanian American community of entrepreneurs. I asked VATRA’s Treasurer, Marjan Cubi, for his personal perspective in the face of the global health crisis. “Since I came to this country in 1974, I have appreciated the American democracy,” he said. Mr. Cubi singled out the policies of President Trump to secure America’s borders, restore its economic and military powers in the world. VATRA’s Executive Financial Officer noted that in the face of the coronavirus pandemic, “the President’s actions of banning the flights from China and limiting travels from Europe, have significantly reduced the number of infection related deaths in the US. And there is a lot of hope for a vaccine in the year 2021.” 

Fiscal Recovery Driven by Intervention

Institutional investors and individual retail investors reportedly saw record sign-ups in the first three months of the year, amid volatility caused by coronavirus. According to analysts, there are not many lucrative alternatives to investing in stocks right now. The government bonds offer super-low returns. The interest rate on 10-year US government bonds is 0.6 %, down from more than 3% in late 2018. So, experts say that buying stock in companies that are still profitable despite the Covid-19 recession looks pretty attractive. Many companies are doing well particularly in tech: Microsoft, Apple, Amazon, Google-owner Alphabet, and Facebook reported strong earnings last week and make up about one-fifth of the S&P 500’s market value. The stock market doesn’t reflect the economy in total. Small businesses and companies that aren’t publicly traded are being hit hard right now. The stock market is sometimes considered to be a leading indicator of what will happen in the economy. Analysts say that investors are pegging some of their hopes to a treatment for the coronavirus, and they’re excited about states reopening. Most agree that in the global health crisis of the coronavirus, predictions about the economy are increasingly difficult. 

You Can Bet On America But Be Careful

The market has been volatile in recent months and moves on a day-to-day news and headlines, which are constantly changing. At the moment, numbers show that the economy shrank 4.8 % in the first quarter and upward of 30 million people have filed jobless claims. I followed billionaire Warren Buffett’s virtual annual 2020 Berkshire Hathaway meeting streamed online. In the 2008 financial crisis, Mr. Buffet encouraged investors to “buy American”. This time he was careful to say that the markets will improve in the long term – though the time frame of his certainty was decades, not months or even years from now. He noted the possibility of a second wave of coronavirus infections and acknowledged that the world might profoundly change for years to come. “You can bet on America, but you kind of have to be careful about how you bet,” he said. Speaking about the overall climate, the Goldman associate admitted that the future is less clear. He described a worst-case scenario: “If we haven’t hit the bottom yet, things will get very, very bad, because then you’ll see a lot of cascading effects where a hedge fund will blow up, which means the pension fund that is invested in the hedge fund now has to take that loss, which means they have to de-risk, so they have to move out of equities. There’s a very real possibility that people could get washed out, not just retail investors, but everybody.” At a time when the stock market has been buoyed by Fed’s maneuvering, moves to reopen America and investors’ willingness to overlook the economic data, he said the energy, oil, real estate and retail industries are all facing problems that could reverberate throughout the economy, and into the banking system. He added that the banks were better prepared in 2008. One statement might have offered Mr. Buffet’s most immediate insight: “This is a very good time to borrow money, which means it may not be such a great time to lend money.”