The cardinal concept that makes the free market run is simple: supply and demand. Simply put, the state of the economy is defined by consumer demand for particular items, whether goods or services, and the availability of those items, or supply. Pricing for goods and services is determined by suppliers based on availability of the resource and the demand for it from buyers. This yin and yang of economics has typically operated smoothly over the past 200 years. The stock market is separate from the economy but what’s happening in the economy will be reflected in the stock market as certain businesses and industries boom and investors all want a piece of the pie, leading to increased demand for shares. If the economy shrinks as it is right now, investors scurry to sell their shares which drives down prices as supply exceeds demand. These market forces and the stocks that follow their lead permeate every industry in the country. For the logistics industry, a large output of supply from manufacturing sectors bodes well as it indicates demand for hauling and shipping services. When production is down, the logistics industry suffers. This article will cover some of the principles of market forces as they apply to our current, unique economic situation with a special focus on the logistics industry.
RECESSION VS. DEPRESSION
A recession occurs when the economy has been shrinking for at least 6 months in a row, or 2 fiscal quarters. This shrinking is caused by decreased trade and industrial activity and is evidenced by a decline in Gross Domestic Product (GDP). The GDP represents the monetary value of goods and services in the country. In relation to the law of supply and demand, the GPD goes down because demand is down and people are not purchasing goods or paying for services like they used to. Typically, brief economic downturns are normal and expected in a healthy market. Normal downturns are known as a correction which is where the stock market falls at least 10% from its 52-week high. However, the downturn we’re in now is not caused by market forces, it’s the result of an international pandemic. We have not yet crossed the time threshold to qualify as a recession though many are worried about one—the drastic consequences of sudden, widespread unemployment and the ratifying for multiple stimulus packages have peaked these concerns.
A depression is much less common than a recession is. It also lasts much longer. It is an economic downturn that lasts for years. The consequences are more severe than a recession. The Great Depression of the 1930s is the most recent example. In March 1929, the stock market experienced a correction. Investors who had used borrowed stockbroker money were financially destroyed. Nervous brokers called in their loans which wiped out some banks who had invested the deposits of customers, who, in turn, lost their life savings (there was no FDIC insurance for your money back then). The economy began to shrink. The Federal Reserve raised its discount rate to protect the gold standard. Over-speculation abounded. The Hatry debacle in September regarding fraudulent collateral made investors nervous. Finally, the market crashed in October. During the early 1930s, prices fell 27%, adjusting for inflation, and world trade fell 66% as measured in dollars. Unemployment was at almost 25% and manufacturing wages fell 34% in the course of 4 years. Major adjustments to fiscal policy, FDR’s New Deal, and employment stimulated by World War II worked in tandem to bring the economy back on track.
In February of this year, unemployment claims were in the 200 thousand range. In the past 4 weeks, 22 million people have filed for unemployment which is essentially all the job gains that have been made in the past 9.5 years. One New York Times article quotes an economist predicting that the steady rate of unemployment will reach into the teens, a rate not seen since Great Depression times. However, this pandemic is an unprecedented event and, by industry standards, the economic downturn it has caused will have to last several more months to even qualify as a recession. We are experiencing the conditions of an extreme economic downturn in a very abbreviated amount of time. The question in everyone’s head is how long we will be dealing will the economic consequences of this sudden turn.
BEAR MARKET VS. BULL MARKET
The terms bull and bear market are said to derive from the way these two animals attack. A bull throws its horns up into the air. The bull, therefore, represents an upwards trend in the market. A bear will swipe downward with its paw, representing a downward trend. There is no universally held standard for how long the upward or downward trend needs to last in order to qualify as one of these market types but there are characteristics that analysts will often use to determine which may be occurring and the role market forces play.
A bull market most often refers to the stock market and describes conditions when prices are consistently rising or expected to rise. This is due to investor confidence in the market in response to a strong GDP rate, rising corporate profits, and low unemployment. The market is difficult to predict as security prices are constantly fluctuating so a bull market is often identified after it has happened. There is no universal measure for a bull market but a common definition in when stock prices rise by 20% after a 20% drop and before a second 20% drop.
A bear market, on the other hand, is when the market has extended price declines. It is typically identified as a bear market if the decline is more than 20%. This is different than a market correction as described above because a correction is a short-term downturn, usually less than 2 months. Entering the stock market during a correction period can be very beneficial while entering during a bear market is extra risky since they can last for such a long and undetermined amount of time. For this reason, investors are pessimistic in a bear market and speculation is down. A declining economy with increased unemployment and lower business profits will often lead to a bear market. In March, the massive stock market losses due to COVID-19 fears constituted the extremity of a bear market in a contracted amount of time. While in April much has been regained (about a 7% increase), experts are not sure we have seen the bottom yet and consider these increases to be “bear market rallies”. In the next section, we’ll take a look at how this downturn has affected the logistics industry specifically.
HOW MARKET FORCES DRIVEN BY COVID-19 EFFECT THE LOGISTICS INDUSTRY
As mentioned in the introduction, a decrease in manufacturing does not bode well for shippers and haulers, especially those who work for small to mid-sized companies. These fleets are usually small businesses themselves with less than 5 trucks. One of the oddities of our time is that, while some facilities are being forced to shut down and send all their workers home, others are ramping up efforts and using their resources to produce medical supplies such as personal protective equipment (PPE) and ventilators (e-commerce sales for protective items have increased by 817% according to Adobe). Manufacturers are facing challenges in the supply chain especially with international partners, decreased demand for many consumer goods, and also face risks to employee health for those who remain open. It’s an uncertain time for everyone and manufacturers of goods are no exception.
During good economic times and bad, the logistics industry is what keeps our economy moving smoothly by getting all items from point A to point B. This connection has been disrupted due to COVID-19. The United States Postal System has canceled services to 72 foreign markets for the sake of caution, decreased capacity, and complications with delivery systems in the receiving countries. For deliveries of all types across the United States, the percentage of delays has increased. Part of the reason for this is that shipments aren’t predictable. Operations are a frenzy with certain shipments being canceled while other orders for essential items like cleaning and food supplies have become astronomically larger. On March 23rd, freight volume peaked and then began to decline dramatically. Freight Waves reports volume being down consistently about 11% each week. Volumes are expected to continue to decline as demand for many services and goods (especially retail) are historically low and millions of small businesses remain closed.
However, one report expresses optimism, claiming that as consumers move from stockpiling emergency supplies back to normal levels of consumption (though it may be mostly through e-commerce) that freight volumes will begin to go back to where they were before. Small trucking companies will need to be strategic and many will most likely need to look into additional financing to carry through these difficult times for logistics services. Despite the economic hardships trucking companies are facing right now, President Trump honored America’s truck drivers on April 16th as “the foot soldiers that are carrying us to victory.”
The economy is experiencing confusing and swift turmoil in the face of this pandemic as evidenced in the strange market forces being driven by COVID-19. Small businesses are bearing the brunt of the consequences of this. Please reach out to us here at Continental Bank to inquire about financing as we all work through this downturn together.
