Post On: April 27, 2020
“And I will make all my mountains a road, and my highways shall be raised up.” -Isaiah 49:11
There is no shortage of bad news, especially when it comes to the impending economic effects of COVID-19. Simply turn on the news, and you will see all that’s wrong in the world (and there’s a lot of it!). The good news is that there is greater hope beyond this world. We know that life won’t always be easy. There will be mountains that stand in our way, but through it all, we can cling to the promises of our faith.
Over the past few months, there have been many mountains in the financial markets, as well as a few signs of clear roadways atop the peaks. Look no further than the month of April, where we witnessed:
A big headline last week came from the collapse of U.S. oil prices, as Brent crude oil prices hit their lowest level in over 20 years. Brent oil fell below $17/barrel, and West Texas Intermediate (WTI) crude oil dropped below $11/barrel. Things became so bad that May oil futures contracts for WTI hit negative territory (below $0) for the first time in history, meaning you actually had to pay someone to take oil from you.
Lower oil prices have been good news for consumers (lower gas and heating oil prices) and for those who store oil, but devastating for those who work in the oil and gas industry and for financial institutions that have heavy lending exposure to that industry.
Currently, oil supplies are much higher than demand, because of the oil price wars between Russia and Saudi Arabia, as well as the severe economic impact from less driving due to stay-at-home orders. This has sent crude oil inventories rising for 13 straight weeks. Combined with the lowest demand for oil in 25 years, you can see why prices are rapidly falling.
The rapid decline of oil and other commodity prices (outside of precious metals) has led to the threat of serious deflation. Deflation is dangerous because, as prices fall, consumers are more likely to postpone purchases and wait for cheaper pricing. That slows the economy and can create even bigger issues. This threat may force the Federal Reserve (the Fed) and other central banks around the world to take decisive actions to help combat deflationary forces from spreading further across many sectors of the economy.
The COVID-19 mountain may have some of its first roads developing, with the U.S. and Europe developing multi-faceted plans to start to reopen parts of our countries. Additionally, many state governors have created statewide plans to coordinate how and when various parts of their local economies will reopen. So far, Europe, Austria, the Czech Republic, Denmark and Norway have already begun the process of gradually reopening parts of their economies; and in this upcoming week, Germany will also begin the reopening process.
It’s no question that April’s economic data will present a major peak we will have to scale, as the results are expected to be some of the worst on record. This will most likely force some states to reopen their respective economies in May and June to prevent further damage. That may mean an end to the quarantines, but questions linger regarding if such openings are going to thrust the population back into undue risk. The balancing of these competing dynamics, people’s livelihoods versus people’s health, may prove to be the biggest mountain in our path.
While we wait for the economy to fully reopen, suppressed commodity prices and record low interest rates are making stock prices, particularly those that pay a dividend, look much more favorable. In fact, while the 10-year Treasury is now sitting below 0.6 percent, the Dow and S&P 500 are yielding greater than two percent, each. This ultra-low interest rate environment is creating stronger demand for both high-yield corporate bonds and stocks paying attractive dividend yields.
As investors, the month of April has been a great time to reassess life’s priorities and financial goals and to make sure assets are in line with risk comfort levels. It has also been a time to lean on our faith and take comfort knowing that God is in control. We trust that the highway has been raised up and will be waiting for us, once this short-term climb is complete.
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