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Market Matters - COVID-19 Update

While the pandemic has continued to spread, there have been some positive recent developments. For example, over a million people worldwide had recovered from COVID-19 as of May 1, according to John Hopkins University’s tracker,1 a milestone that would not be possible without the courage, dedication, and sacrifice of front-line medical workers.

More good news came last Friday, when the U.S. Food and Drug Administration (FDA) approved the emergency use of an antiviral drug called remdesivir,2 which showed promising, albeit modest, results in a large clinical trial. The drug is believed to help shorten the length of recovery time for some patients severely infected by COVID-19, which of course is not a cure but is a step in the right direction. The drug was described by Dr. Anthony Fauci, Director of the National Institute of Allergy and Infectious Diseases and a member of the White House Coronavirus Task Force, as a “proof of concept” and an important development, even if there has been some criticism.3

The search for a COVID-19 vaccine is under way. There are about 100 research groups around the globe working on potential vaccines, with at least eight in the early stages of human trials. Although it is impossible to know exactly when a vaccine will be available, the effort to find one is unprecedented in terms of scale and speed. Dr. Fauci believes a vaccine could be developed in 12 to 18 months if everything goes well,although an Oxford University team believes it could have a vaccine later this year.5

As many Americans feel the pain from the emotional and economic impact of the virus, over 31 states have either relaxed or are in the process of loosening restrictions and “shelter-in-place” orders to varying degrees, which means Americans will see a patchwork of approaches. The hope is that the combination of warmer weather, increased testing, and the flattening of the curve will allow for some normal activity with the proper precautions. Lifting restrictions too soon could lead to an increase in COVID-19 cases, and models are projecting higher deaths as a result of increased mobility, but many public officials are facing the difficult task of balancing the public’s safety with their ability to earn a living.6

Economic Update: Mixed Signals and Liquidity

The Federal Reserve (the “Fed”) announced that as part of its asset purchasing program, it will now begin to purchase bond ETFs to maintain liquidity in the credit markets. The Fed is confident that its actions are having a positive effect on credit markets. “Many companies that would’ve had to come to the Fed have now been able to finance themselves privately since we announced the initial term sheet on these facilities,” Fed Chair Jerome Powell said during an April 29 press conference.7 Another signal of credit liquidity is also positive: excess reserves in depository institutions have grown to record levels at over $3 trillion as of April 22.8

On the other hand, banks have tightened their lending standards even in the face of growing demand from middle to large market firms.9 Other avenues are available, such as business development company (BDC) vehicles and other shadow market lending pools. At this time, it is unclear how well these non-traditional markets will be able to meet the demand.

Economic Signals

There were 3.9 million weekly initial jobless claims last week, dashing market hopes for a more significant decline from prior weeks. Economic activity in the manufacturing sector, as measured by ISM’s Purchasing Managers’ Index (PMI), fell to 41.5, which was better than the forecasted 36.9 (a measure below 50 indicates a contraction). Existing home sales slid 8.5% to an annualized 5.27 million homes in March, as compared to February when the pandemic had not yet impacted the economy.10 Existing home sales in March were up 0.8% year over year, but we can likely expect a decline in April. New home sales fell 15.4% in March to an annualized rate of 627,000, and we expect a further decline in April.11 Durable goods orders fell by 14.4% in March, driven mostly by transportation. Excluding transportation, orders declined by 0.2%, driven by non-defense aircraft and parts.12

Market Update: Reopening, Treatment Optimism

Equity markets continue to be volatile, rising on hopes of economies reopening and the continuing development of COVID-19 treatments, but falling as economic indicators and corporate earnings remain dire. Early last week equities rose as various states announced steps to reopen their economies and there were positive developments surrounding COVID-19 antiviral drugs and vaccines. Equities ended the week down as unemployment claims, personal spending, and some corporate earnings were worse than expected. The optimism seems to be back this week due to more news on reopenings and treatments. Oil is also up for the month, closing at $24.56 on May 5, compared to $18.84 as of April 30. Although concerns persist about an over-supply of oil and a lack of storage, supply is expected to decline.

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1 “COVID-19 Dashboard,” John Hopkins University & Medicine. https://coronavirus.jhu.edu/map.html. Visited May 4, 2020.
2 “FDA Issues Emergency Use Authorization for Potential COVID-19 Treatment,” U.S. Food and Drug Administration(FDA). https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-update-fda-issuesemergency-use-authorization-potential-covid-19-treatment. May 1, 2020.
3 “Remdesivir Shows Modest Benefits in Coronavirus Trial,” New York Times.
https://www.nytimes.com/2020/04/29/health/gilead-remdesivir-coronavirus.html. April 29, 2020.

4 “COVID-19 vaccine hunt heats up globally, still no guarantee,” ABC News.
https://abcnews.go.com/Business/wireStory/covid-19-vaccine-hunt-heats-globally-guarantee-70483595. May 3, 2020.
5 “In Race for a Coronavirus Vaccine, an Oxford Group Leaps Ahead,” New York Times.
https://www.nytimes.com/2020/04/27/world/europe/coronavirus-vaccine-update-oxford.html. April 27, 2020.
6 “Researchers double U.S. COVID-19 death forecast, citing eased restrictions,” Reuters. https://www.reuters.com/article/us-health-coronavirus-usa/researchers-double-u-s-covid-19-death-forecastciting-eased-restrictions-idUSKBN22G1T3. May 4, 2020.

7 “New York Fed Says It Will Begin Buying ETFs in ‘Early May’,” Bloomberg.
https://www.bloomberg.com/news/articles/2020-05-04/new-york-fed-says-it-will-begin-buying-etfs-in-early-may. May 4, 2020.
8 “Excess Reserves of Depository Institutions,” Federal Reserve Economic Data (FRED).  https://fred.stlouisfed.org/series/EXCSRESNW. Visited May 5, 2020.
9 “Net Percentage of Domestic Banks Tightening Standards for Commercial and Industrial Loans to Large and Middle-Market Firms,” Federal Reserve Economic Data (FRED). https://fred.stlouisfed.org/series/DRTSCILM.Visited May 5, 2020.
10 Existing-Home Sales,” National Association of Realtors. https://www.nar.realtor/research-andstatistics/housing-statistics/existing-home-sales. Visited May 5, 2020.
11 “Monthly New Residential Sales,” U.S. Census Bureau https://www.census.gov/construction/nrs/pdf/newressales.pdf. Visited May 5, 2020.
12 Weekly Economic Vital Signs - Thick of the Recession,” Seeking Alpha.
https://seekingalpha.com/article/4340186-weekly-economic-vital-signs-thick-of-recession. April 27, 2020.

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