Coronavirus Update – Part 2
“SpaceX’s success is one small step for man, one giant leap for capitalism.”
– Marc A. Thiessen
It has been about three weeks since Part 1 of our Coronavirus update, and we hope this email finds everyone healthy and starting to slowly return to a more normalized daily routine. There are still a lot of unknowns health wise as to what the future holds in terms of the effects of the virus, but economically speaking, there is starting to be more clarity. Here are a few major data points we now know:
- Gross Domestic Product (a broad measure of our country’s economic health) shrank at a rate of 5% in the first quarter of 2020, marking the biggest quarterly decline since GDP fell 8.4% in the fourth quarter of 2008 during the Recession.
- 2nd quarter estimates are calling for a 30-40% decline in GDP. This would mark the worst economic decline since the Great Depression.
- For the week ending May 23, there were 2.12 million initial unemployment claims. Not good, but down from 2.44 million the week earlier. The total unemployment rate is still expected to rise to around 20% or more for the month of May. For some context, it is estimated that the unemployment rate reached around 25% during the Great Depression.
Amid a period of record unemployment and record upcoming GDP decline, US Equity Markets have continued to climb the wall or worry. How can this be? In our view, it summed up by nothing more than optimism about the future, in both the short and long term. While we do expect to see significant volatility throughout the summer months and into the fall, there are many reasons to be optimistic, and we have touched on a few notable ones below…
Federal Policy Response: It is no secret that the Federal Government has thrown everything and the kitchen sink at this problem. The Paycheck Protection Program and Healthcare Enhancement Act ($483 Billion), the CARES Act ($2.3 Trillion), the Coronavirus Preparedness and Response Supplemental Appropriations Act ($8.3 Billion) and the Families First Coronavirus Response Act ($192 Billion) have all been signed into law. Another stimulus package (the Heroes Act or some version of it) is on the horizon and will most likely be passed in some form. *
On top of that, the Federal Reserve and the US Treasury (US Taxpayer) have worked individually and together to lower interest rates and create a number of new facilities to support the flow of credit at all levels – from money market funds to corporate bonds to mortgages to credit card payments. Regulations were rolled back at the community bank level and even Fannie & Freddie have provided mortgage forbearance for certain borrowers.
While done very rapidly and by no means in a perfect manner, this massive increase in the Federal debt level will have to be dealt with at some point in the future, most likely in the form of regulations and higher taxes. But this response has probably taken the worst-case economic scenario off the table in the short term and put massive amounts of much needed liquidity into the hands of individuals and small and large businesses alike.
Economic Re-Opening: As our economy starts to re-open on a local, national, and international level, the hope is that there is an uptick in economic activity across the board as consumers start to consume again. It is going to take a long time before we see robust economic data like we saw pre-coronavirus, but things are slowly getting better, and there are reasons to be optimistic.
One example is travel. On April 14th, 87,534 people went through a TSA checkpoint. This was the least travelled day since the outbreak of the virus. On May 31st, 352,947 people went through a TSA Checkpoint, showing a significant uptick, but still far from the over 2.5 million people that travelled on May 31st of last year. So positive news, but still not anywhere near what it takes for airlines and the travel industry at large to return to profitability.
Vaccines: In the 1950s, hundreds of thousands of Americans got the measles every year. In 2015, after decades of vaccination, less than 200 cases were reported, a remarkable achievement by our medical community.** Hopefully we can find the same success with the Corona virus, and it seems as if the hope for a vaccine is growing by the week. It is by no means guaranteed that we ever have one, but modern medicine’s use of artificial intelligence, machine learning, and cloud computing is helping experts worldwide to solve this problem, and do it in a much more timely manner than we’ve seen in the past.
For example, Nvidia’s genomics software, Clara Parabricks, has achieved a new speed record by mapping the entire human genome DNA sequence in under 20 minutes. They are giving this software away for free for 90 days to Covid-19 researchers. It is remarkable how intertwined the healthcare and technology industries have become, and it is exciting what the future holds in terms of our ability to quickly identify, treat, and possibly eradicate certain diseases.
Space Launch! This may not be an economic data point, but if you’re looking for something positive to build off of, look no further than the May 30th launch of the SpaceX Falcon 9 rocket that took 2 American astronauts to the International Space Station on the Crew Dragon Spacecraft. Entrepreneurialism, human ingenuity, and innovation are the backbone of our economy, and there is no greater example of this than what we witnessed on Saturday.
Founded by Elon Musk in 2002, SpaceX became the first private company to launch astronauts for NASA, and this marked the first crewed launch to orbit from the United States since the space shuttle program ended in 2011 (NASA has been paying upwards of $80 Million per passenger for a seat on the Russian Soyuz spacecraft). On top of that, they were able to successfully land the Falcon 9 rocket (after separation from the Crew Dragon) back onto an autonomous drone ship roughly 10 minutes after launch.
While SpaceX has been providing commercial launch capabilities for years, it was not until 2017 that they first successfully recovered and reused of one of their rockets. Currently, it costs roughly $60 Million for use of their Falcon 9 rocket. The ability to reuse these rockets over and over will push that cost lower, provide a significant savings to their customers and will help fast-track the commercial space travel industry. Elon Musk’s relentless push for innovation and achieving the unachievable at a continuously lower cost is one of the great feats of our time.
At the core of any investment is faith in the future. The people at SpaceX have invested their money, time, and energy into modernizing space travel. 10 years ago, even they may not have imagined what they achieved this weekend would happen so fast, and we cannot wait to see what they accomplish over the next 10 years. That, if nothing else, keeps us optimistic about the future.
Stay safe and healthy, and please let us know if there is anything we can do for you.
Sincerely,
Your Verdi Wealth Management Team