COVID-19 is changing U.S. markets, for better and for worse

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Photo by Chris Liverani on Unsplash

The COVID-19 pandemic has thrown the world’s financial markets into a rapid decline, raising critical questions about investments, business trends, and the future of the global economy. You might have asked yourself lately, “Are we in a recession? What is happening with oil? What industries are being hurt most by the current crisis?” While we don’t know the answers to a lot of these questions, we found a few people who did.

In our April 23rd event, “US Market Outlook during COVID and Beyond,” we teamed up with experts at BlackRock and the Progressive Investors Network to examine market fundamentals and the macroeconomics of the new financial policies put into place in the United States to address the current economic challenges. While we weren’t able to record the call for security and privacy reasons, we wanted to share some key takeaways from the call, as well as further reflection on the topics.

#1: This is an unusual economic crisis that requires an innovative response.

According to panelist Kurt Reiman, Managing Director and Senior Strategist for North America at the BlackRock Investment Institute (BII), the current U.S. economic crisis is completely different from any economic crises we’ve faced before, in that the current downturn is a direct result of deliberate efforts to mitigate the humanitarian crisis caused by the COVID-19 pandemic. So, while some of the same economic indicators are showing signs of a recession — rapidly rising unemployment, lower consumer spending, and more — the underlying causes are incredibly different.

For starters, because of the shelter-in-place policies enacted by state governments and municipalities across the country compounded with surging unemployment numbers, consumer spending is being crippled in an unprecedented way. According to the Commerce Department’s Bureau of Economic Analysis (BEA), real disposable personal income (DPI) decreased 1.7 percent and real personal consumption expenditures (PCE) decreased 7.3 percent in March. Even with stimulus checks, emergency unemployment benefits, and other incentives to spend, people physically can’t go out and shop, with at least 46 states shutting down most non-essential businesses until further notice. This has restricted much of consumer spending to online shopping, which has surged — but with the rapid increase in demand, e-commerce retailers are facing serious logistical challenges.

Reiman commented that if we want to get the US economy out of trouble, we shouldn’t be thinking of the current moment as a traditional financial crisis. Why? Because the traditional tools and thinking used to address a recession (such as lowered interest rates offered by the Federal Reserve) are based on past economic patterns and predictions about how the future may correlate with those patterns. In many ways, the current crisis is unprecedented and we don’t have a lot of data to help inform our economic predictions and create a more effective response. The closest versions of the current crisis are the Spanish Flu of 1918, and the SARS outbreak of 2003, but neither are similar enough to really help inform our economic response, as the world economy is drastically different than in 1918, and the 2020 COVID-19 outbreak dwarfs the SARS outbreak in scope and size.

With the US GDP sinking 4.8% in the first quarter of 2020 — the most substantial drop since 2008 — the rest of 2020 isn’t looking so good. So while this crisis might not be a true “recession,” it is shaping up to be every bit as severe as one. This makes the response from the Federal Reserve and US Lawmakers so crucial. While US lawmakers came together in a bipartisan effort to pass the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law last month, and while the Fed has announced additional measures to respond to the economic effects of the pandemic, there will likely be worse to come. The uncertainty of the future will require vigilance and versatility on the part of the Fed and Congress in the weeks and months to come.

#2: As oil panics, renewable energy investment will see significant growth.

Earlier this month, oil futures went negative for the first time, ever. How did this happen? BII’s Kurt Reiman said that this was likely caused by the ‘perfect storm’ of technical problems in tandem with virus-related problems. In the first quarter of 2020, U.S. crude producers, many of whom hedge their production costs, were hit hard by the price war between Russia and Saudi Arabia, creating a large surplus of crude oil.

That surplus, combined with an unprecedented reduction in demand for motor gasoline, forced U.S. producers to sell their oil at negative prices in order to free up their storage capacities. With oil prices not expected to make a recovery until at least late in 2020, the U.S. oil and gas industry is facing a rocky year. For consumers, doesn’t that mean lower prices, and less incentive to “go green?” Not necessarily. Forbes’ Cherry Reynard argues that this crisis is unlikely to make a large dent in renewable energy. In fact, it might be a turning point in the battle against climate change as people see the positive effects of reduced automotive and air traffic — and the resulting reduction in air and noise pollution. Renewable energy has become much more price competitive in the past year. So for renewable energy producers, buoyed by a record $2.6 trillion in clean energy investment from 2010–2019, the volatility in the oil and gas markets presents a unique opportunity to stage a coup in the energy industry.

While oil stocks are plunging, investors are already looking to renewables for stability and growth, giving renewable energy companies a crucial boost. As global fuel demand continues to slump, major oil and gas companies are beginning to move towards more significant investment in their own clean energy programs to compete with the rising threat of dedicated renewable energy companies.

Photo by Gabriel Benois on Unsplash

#3: The U.S. tech industry is having a renaissance.

With U.S.-based tech companies accounting for more than 30% percent of the global tech industry, the U.S. is the global leader in the technology sector. And during quarantine times, that means unprecedented business opportunities. For starters, a recent waveform poll revealed that more than half of the U.S. workforce is now working from home, creating a massive boost in use of online video conferencing solutions such as Zoom, Skype, Webex, and others.

And while Zoom’s number of daily participants skyrocketed from 10 million in December to more than 300 million in April, its explosive rise to the top of the market and several security breaches have created increased concerns about the privacy and security of online video conferencing solutions. These concerns, coupled with the massive surge in demand for video conferencing, have dramatically increased the competition in the video conferencing market, with companies like Google, Microsoft, and Cisco coming after Zoom’s market share with new features, free services and enhanced security measures. With this increase in competition — we may see a very different and greatly improved online video conferencing market by the end of 2020.

But online video conferencing is just the tip of the tech iceberg. Online shopping is surging, and video streaming consumption is soaring, with Netflix hitting an all-time high in subscribers in late March and reporting 16 million new subscribers in the first three months of the year. However, as the quarantine drags on, consumers are beginning to look for more innovative and interesting ways to keep themselves busy, entertain themselves, or get creative and remain productive. This new interest in unique online and digital entertainment has created a golden opportunity for experimental technologies like Augmented Reality (AR) and Virtual Reality (VR) to make their way into the entertainment mainstream. Recently, the International Data Corporation (IDC) projected AR/VR spending to hit $18.8 billion in 2020, a 78% increase from 2019.

U.S. tech companies are also seizing the moment to do social good to combat the COVID-19 pandemic, hoping to restore faith and trust in tech in a time when companies like Facebook and Google are facing enormous backlash amid growing privacy concerns. Companies across the country are offering free and reduced services to those hit hardest by the fallout from the pandemic, including digital menu technologies for struggling restaurants, free self-help tools to navigate unemployment, free virtual therapy sessions, and more. Social media has gained a restored sense of community as people look for meaningful connections and solidarity online while maintaining social distancing.

In short, while the future is uncertain, U.S. tech companies are being given an immense opportunity to reinvent themselves, experiment with new technologies, and build stronger foundations for their future.

#4: As the world barrels towards an uncertain future, open innovation is key.

While our panelists couldn’t say for sure what the future holds, one thing remains clear to us at swissnex Boston: small businesses, startups, and corporations need to invest now in open innovation to be better prepared for a future that will see growing challenges as climate change threatens global supply chains, pandemics destabilize normal business routines, and more.

At swissnex Boston, we can help you navigate these uncertain times by building customized communities between North America and Switzerland, and helping businesses to learn, grow and adapt with changing times. Whether you are a start-up looking for a creative space and ecosystem in which to grow your company and attract investors, a medium-large sized company looking for best practices in your industry, or a large corporation ready to add open innovation to your portfolio, we’ve got you covered in good times, bad times, and everything in between.

For questions about swissnex Boston’s work with innovation, please contact our Head of Innovation+, Alicia Evangelista at alicia@swissnexboston.org.

For questions on US Markets, feel free to reach out to Managing Partner of Progressive Investors Network, Joshua Wilson at jwilson@pinboston.com.

Thanks to BlackRock and PIN Boston for helping to host this event.

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Connecting the dots between Swiss and North American innovators. www.swissnexboston.org

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