Housebound Americans understandably spent much of Easter week watching and waiting for various curves associated with the pandemic to flatten, anticipating the day when they could contemplate terminating social distancing and isolation. In mid-April, America and most other nations weren’t there yet.

But for investors, the more important question may be not when the coronavirus peaks but when unemployment does. For the four weeks ending April 16, a stunning 22 million people filed for unemployment.

In contrast, it took the better part of two years for the U.S. economy to lose 9 million jobs during the Great Recession. Moreover, the nation was running an almost $1 trillion federal budget deficit before the pandemic, and that figure is expected to climb to $3 trillion or more.

This time really is different, as the current recession has been engineered by politicians and public health-care officials. “This is a shock to the real economy that is affecting the financial markets, not vice versa,” observes Vanguard chief economist Joe Davis. “Hopefully, it will be short-lived, but it will still be deep and scarring.”

As it currently stands, the second-order effects are still playing out. Historical experience indicates that transformational events—and the pandemic certainly qualifies as one—usually accelerate trends that were already underway, Davis says.

By any yardstick, a speedy 37% decline in the S&P 500 qualifies as a bear market. “If this were a normal bear market, I’d say it’s over,” says Loomis Sayles vice chairman Dan Fuss.

But this is hardly a normal world. State and local governments are going to face more severe challenges than they did during the financial crisis, Fuss believes. Municipal employees in many states could see their pensions restructured.

Quality Stands Out
When it comes to equities, it is already clear markets are favoring companies with high-quality balance sheets and reliable revenue streams. This comes after a decade during which corporations were the only reliable buyers of stocks. Some often borrowed heavily to repurchase their shares. Now the market is saving its more severe punishment for companies that overleveraged themselves to engineer earnings growth.

Estimates of how much corporate debt will be classified as junk range from $200 billion to $1 trillion. T. Rowe Price expects the amount of downgrades on bonds sitting just above fallen angel status to fall into the $200 billion to $300 billion range, but those numbers could rise if the coronavirus downturn extends into the third quarter, says Chris Dillon, portfolio specialist at the firm.

Covid-19 sent spreads in the high-yield market to more than 900 basis points over comparably dated Treasurys. “We think it’s an attractive opportunity, but it’s going to be a bumpy ride,” Dillon says.

Business models are likely to change—and not for the better as far as jobs are concerned. On April 15, the market capitalization of Netflix, which employs about 7,000 people, surpassed that of Disney, which employed about 200,000. Certain businesses are going to have to act differently. Take the airline industry, a historically cyclical, unprofitable business where companies have managed to enhance earnings by maximizing their passenger loads over the last decade. They also embraced a process known as densification. Essentially, that entailed installing another row or two of seats, packing passengers in like sardines. It remains to be seen whether customers will continue to accept these business practices in a post-pandemic world.

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