Covid-19 Resurgence, Unemployment Numbers And Corporate Bankruptcies All Point To A Tough Road Ahead

There’s a disconcerting confluence of events, including a resurgence of Covid-19 cases, corporate bankruptcies, companies continuing to lay off workers and an overheated stock market that looks like it’s due for a correction, that indicates a tough road ahead. 

CNN reported Thursday that there may be “apocalyptic” surges of Covid-19 in Texas and record-setting new cases in some states. According to reports, the coronavirus death toll has climbed to 121,979 and has infected roughly 2.4 million Americans across the nation. Florida and Texas recorded more than 5,000 new Covid-19 cases—a new daily record. California reported over 7,000 cases, also setting a new record high. Houston looks like it could be the worst outbreak hotspot if the trend continues. New York City suffered the largest blow from the outbreak and has now initiated a 14-day quarantine for people coming into the city from a number of other states that have seen increasing cases. 

The new wave of outbreaks has an impact on the economy and job market. Ian Shepherdson, chief economist at Pantheon Macroeconomic, said, “The danger now is that claims rebound in other states where infections are rising rapidly, and people are starting again to stay away from restaurants and malls.” 

The resurgence of Covid-19 cases has dashed cold water on a stock market that’s been on fire lately. In response to the alarming increase in cases, the stock market had a big sell off Wednesday with the Dow Jones plummeting over 700 points and other major indices down about 2.5%. 

There’s now an underlying fear that if this surge continues, states will consider reinstating  stay-at-home orders and possibly reordering businesses to close down again. This action, if warranted, may help stem the tide, but would be disastrous for the economy, job market and mental health of people.

 The stock market’s rise was one of the few positive signs over the last several months. Investors were betting that even though things looked bleak currently, they made investments based on their optimistic view of the future. This drove the stock market 30 to 40% higher than its pandemic lows and on the precipice of getting back to where it was pre-coronavirus and possibly hitting new records. With the new reports, this may substantially change things.

Liz Ann Sonders, the long-time chief investment strategist at Charles Schwab, said that  investors may have become too complacent about the epidemic and too hopeful that a V-shaped—or quick—economic recovery would take place. “We probably had a lull because of ‘hopium’ around stronger economic data recently, but concerns are increasing (justifiably so) about the ability for the economy to sustain a V-shaped recovery with rising cases,” said Sonders. She soberly added, “Even if governments don’t shut things down again, it won’t prevent businesses from doing so, or consumers from deciding on their own to shelter in place again.” 

The majority of investors in the stock market are institutions and wealthy individuals. According to NPR, there has been a detrimental deterioration in spending by the wealthy. The report asserts that the pullback in spending by the rich is “crippling” the country. The U.S. consumer is the biggest driver of the economy. Specifically, the downturn in shopping by the top quartile of income-earners accounted for roughly 60% of the total decline in spending since January. The less money spent, the more restaurants and businesses will continue to lose revenue. They, in turn, will need to hold off on hiring new employees and potentially layoff staff.

An increasing stock market causes a “wealth effect.” People who’ve invested and realize strong returns feel more confident and are comfortable spending their money. As stocks decline in value and the wealthy see their gains turn to losses, they’ll likely hold back on spending, which will further harm the economy.

This week, GNC, the 85-year-old vitamin seller, filed for bankruptcy, as well as restaurant chain Chuck E. Cheese. The two well-known brands joined J.C. Penney, Hertz, 24 Hour Fitness, J. Crew, Neiman Marcus, Pier 1, Gold’s Gym and other iconic companies that have also recently filed for bankruptcy protection.

The U.S. Department of Labor reported Thursday that 1.48 million Americans filed for unemployment benefits in the week ending June 20. This is the 14th consecutive week that claims have topped 1 million. Additionally, 728,000 Americans filed for benefits from Pandemic Unemployment Assistance—a federally-funded emergency program for the self-employed and  independent contractors.

Reuters reported that although businesses have started opening, “weak demand is forcing U.S. employers to lay off workers and the labor market could take years to recover from the COVID-19 pandemic.” Gus Faucher, chief economist at PNC Financial said, “There were some businesses that tried to maintain their workforce, waiting to see what would happen as businesses reopened. Even as the economy is picking up, they are not seeing a lot of demand and are deciding that they don’t need that many workers.”

With the toxic combination of additional new Covid-19 cases, a falling stock market and corporate bankruptcies, it’s logical to believe that companies will continue laying off workers and implement hiring freezes. Given the risks and uncertainty, it wouldn’t make sense for them to hire—unless there’s a specific pressing need.  

Clearly, in light of the new data, our elected officials must take action to turn things around before they become even worse. Addressing these issues before Congress, Federal Reserve Chair Jerome Powell said, “We do think you’ll want to continue support for workers in some form.” The Treasury should continue providing stimulus money to Americans to help them and keep the economy afloat. Otherwise, Powell predicted, “There are going to be an awful lot of unemployed people for some time.”

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