A Comatose Giant Begins to Awaken

Article by Ed Fortunato

As COVID-19 spreads across the globe,  about 80% of the world’s population has been engaged in many forms of social distancing. Mandated social distancing, combined with personal behavior, have resulted in drops in both discretionary consumption and non-discretionary consumption as well as a decline in business and household investment.

The sudden drop in economic activity has hurt debt-ridden companies and companies struggling with cash flow the most. We expect a loss of some small businesses, as well as restructuring in sectors such as energy and leisure, two areas that have been hurt the most.

Government programs have been crucial to the survival of many companies and individuals but will not keep us out of a severe recession.  Don’t underestimate the impact of governmental action. It has kept people fed, has supported the financing industry and buoyed the economy from deeper depths than we have seen. Plus, it will assist in the rebound coming up.

The Road to Recovery

The strength and speed of the recovery are dependent on several things, all of which are better together, such as the ability to flatten the infection curve, widespread virus testing and the holy grail  ̶  a vaccine.

The velocity of a return to a “normal” economy will be impacted by the level of unemployment, the temporary or permanent nature of the job loss and the speed of the restart.  During the restart, the crucial factor is if a second wave occurs, what the severity and duration of that might be and the actions taken to protect the population.

The economy is beginning to see signs of improvement as a direct result of Federal Reserve and Congressional action. Some of these signs include:

• After a 33% slide from record highs to recent lows in one month, the S&P 500 has gained back ~62% of the loss; while the NASDAQ is even stronger.
• Expectations for a ~20% jump in Gross Domestic Product (GDP) in Q3.
• Airline passengers which dropped to 80,000 a day, increased to ~350,000 over Memorial Day weekend. These numbers are still way below the “normal” average day of 2.9 million but an improvement.
• Even Apple mobility data has seen an increase in routes requested and gasoline demand, which usually averages 10 million bbls a day; its drop of  3 million bbls a day has rebounded to the ~8 million bbl a day range.

And the signs of improvement seen in oil and gas include:

• Oil markets, which saw a dramatic decline in demand, have rebounded.
  • Crude oil prices have rallied ~$70 from April 20th to June 1st, with gasoline and heating oil prices following.
• Stable natural gas exports and demand from power generation have kept prompt natural gas prices from falling to new lows while the promise of continued reduced production because of the loss of associated gas have pushed forward markets higher.
  • January 2021 natural gas has moved from the $2.50 range to the $3.00 range since the virus took hold.

Regardless of the virus path, this economy is resilient and will come back stronger than ever; the only question is timing.

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Guest Author: Ed Fortunato, Chief Economist
Ed Fortunato, chief economist at Exelon Company, is responsible for providing fundamental views of the economy, oil and natural gas. Ed has spent more than 15 years with Exelon having begun his career managing the proprietary trading book, the short-term analytics group and has led the implementation of trading strategies in both the prop and hedging books since his arrival. Ed has an MBA with high honors in finance from Boston University and a BBA from Baruch College.