COVID-19: Research Update I


Will McIntosh, Ph.D
Global Head of Research

John Kirk, CAIA, CCIM
Senior Director, Research

Mark Fitzgerald, CFA, CAIA
Executive Director, Research

Karen Martinus
Senior Associate, Research

Chenchao Zang
Senior Associate, Research

Jane Zheng
Associate, Research

April 6th, 2020

Economic Outlook

Last week, the first quarter of 2020 came to a close, and with it came a surge of data that highlighted COVID-19’s broad impact on the U.S. economy. Across the board, the results were abysmal, as one might expect when a consumer-driven economy comes to a halt for several weeks.  The economic turmoil was highlighted by a record number of jobless claims (approximately 10 million) that occurred over the last two weeks, which we will discuss in detail later.

The one bit of positive news is that economists generally expect the $2 trillion CARES Act to have a material impact on the near-term growth outlook, possibly adding up to 10 percentage points to second-quarter GDP, according to Moody’s.  Yet, despite the unprecedented amount of fiscal stimulus, the consensus is that second-quarter GDP will still be in negative territory (possibly down 15-20%), albeit less severe than some of the previous forecasts.

Monetary Policy

The Federal Reserve (Fed) has aggressively provided liquidity in response to the turmoil in financial markets. Its balance sheet has ballooned to $5.7 trillion, from less than $4 trillion before the pandemic.  With the introduction of new lending facilities and bond purchases resulting from the passage of the CARES Act, the Fed’s balance sheet could swell to over $10 trillion, or close to 50% of GDP.  The unwinding of such a massive balance sheet will one day be of great concern for many market participants, but for now, the Fed is playing a central role in navigating the current crisis.

The following highlights a few key characteristics of the newly created credit facility that is targeted at struggling industries:

  • Not only does the Fed have control of a $454 billion credit facility (revised up from $425 billion in the final CARES Act bill), it can also lever up 10 to 1, creating $4.5 trillion in lending capacity, more than 20% of GDP. Effectively, the $4.5 trillion lending potential is nearly double the total value of Commercial and Industrial loans (any loan made to a business or corporation, as opposed to an individual) that were outstanding at the end of 2019.
  • The officials administering the program should have sufficient flexibility to provide bridge loans to impacted industries for the duration of this crisis, assuming the infection rate starts to ease in the coming weeks, similar to the pandemic timeline in Asia.
  • A stipulation of the CARES Act limits borrowers from purchasing their own shares until a year after they have repaid any CARES Act loan. This requirement could end up being significant for public companies, given that buybacks have been a critical driver of stock performance. Since 2010, buybacks have consumed about half the free cash flow of the companies in the S&P 500, according to a recent Bloomberg report. 

Fiscal Policy

The CARES Act was arguably the most extensive fiscal policy intervention in the history of modern government, and yet, there could be even more stimulus on the horizon. President Trump and Speaker Pelosi seem to be of the same mind regarding the need for an infrastructure bill, according to recent reports. This initiative could accelerate an eventual recovery by creating employment opportunities for the millions of Americans who will have lost their jobs in the aftermath of this health crisis, while simultaneously launching a much needed domestic infrastructure investment program.

Property Markets

On the CRE front, rents came due on April 1st, and landlords have been understandably concerned that many tenants could not or would not pay. While the final tally is not yet available, the following should help frame the likely outcome:

  • The experience of the U.K. may give the U.S. some idea of what to expect. In the U.K., rents are paid quarterly in advance, on fixed dates known as quarter days. The March 25 quarter day was bleak; just 33% of retail and food & beverage tenants paid their rent on time, and the majority asked for some sort of concession, according to Knight Frank.
  • In the U.S., landlords have been preparing for a significant increase in credit losses amongst retail tenants, to be followed by declines in multifamily beginning this month, and likely followed by office in the coming months. More data will be available regarding this issue in the coming week.

COVID-19 and Jobless Claims

As of April 1st, the U.S. had 28 states with over 1,000 cases of COVID-19.  The correlation between COVID-19 cases and initial jobless claims filings the past two weeks is relatively strong, at 0.50.  When adjusting for the size of the state, the correlation is lower, but still significant at 0.30.[1]  What may be more important, as shown in Exhibit 1, is the severity of the measures taken by the state and local governments.  As of April 3rd, 38 states are under statewide “Stay at Home” legal orders, 11 have voluntary “Social Distancing” directives in place, and South Dakota is the only state with neither.  States that have seen less initial jobless filings as a percent of the labor force are disproportionately under less restrictive measures – these include South Dakota (2.2%), Florida (2.5% – Stay at Home only issued April 1), and Texas (3.0%, currently under “Social Distancing” at the state level).

Given the nature of this downturn, it is to be expected that the retail, leisure, and hospitality sectors will be disproportionately impacted.  As a result, markets that are underweight these sectors may be likely to outperform.  Exhibit 2 provides a list of major markets that are under-and overexposed to these sectors in terms of their labor force.

Concluding Thoughts

While financial markets gradually started showing signs of stabilizing last week, we believe the risks remain weighted heavily to the downside. Despite extraordinary levels of fiscal and monetary stimulus, the U.S. economy is vulnerable so long as the threat of the virus persists. Thus, we expect investors to remain cautious in the face of elevated market volatility until COVID-19 is under control, and its true economic impact is revealed.



These materials represent the opinions and recommendations of the author(s) and are subject to change without notice. USAA Real Estate, its affiliates and personnel may provide market commentary or advice that differs from the recommendations contained herein. Certain information has been obtained from sources and third parties. USAA Real Estate does not guarantee the accuracy or completeness of these materials or accept liability for loss from their use. USAA Real Estate and its affiliates may make investment decisions that are inconsistent with the recommendations or views expressed herein.

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[1] Adjustment compares COVID-19 cases as a percent of population vs. initial jobless filings the past two weeks as percent of labor force.