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How Optimistic Should We Be on U.S. Economy?

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The U.S. economy is pretty much a mixed bag right now amid spikes in new reported new COVID-19 cases in some states, according to Gary Cohn, former director of the National Economic Council and President Donald Trump’s former chief economic advisor, and Glenn Hutchins, co-founder of Silver Lake Partners.

They were among the participants in a Securities and Exchange Commission virtual roundtable that was webcast Tuesday, where the main topic debated was pandemic-related disclosure needs.

The United States is “quite mixed” in terms of where different regions of the country are at when it comes to the pandemic and economic recovery efforts now, Cohn said during the webcast, “Q2 Reporting: A Discussion of COVID-19 Related Disclosure Considerations.”

“But, in some respects,” the view is “fairly optimistic because, I think, most people feel like that the worst is behind us,” he said. We are “a lot more knowledgeable about the coronavirus right now [and] how to treat it,” he noted. Meanwhile, “deaths are going down [but] hospitalizations are still relatively high,” he conceded.

“But there is some optimism in the economy” in the United States “because of all the stimulus we’ve seen and the low interest rate picture,” Cohn said. Because of that, “a lot of consumers have an enormous amount of disposable income and pent-up demand” to spend money and “I think we’ve seen that” from the openings of the economy that have taken place thus far in the country, he said.

‘Still in the ICU’

However, Hutchins said he was “probably a little less optimistic,” adding: “I think the operative word rather than mixed is uncertain.”

Hutchins recalled that when asked a week ago about the state of the economy, he said: “The good news is that the prognosis has gone from critical to stable. The bad news is that we’re still in the ICU.”

At the start of 2020, the projection for S&P 500 earnings was up 9%, and now it is projected to be down 21% — “a 30 percentage-point swing,” Hutchins noted, adding: “It might be a little bit better than we feared a couple of weeks ago, but it’s still not good.”

Another key factor to consider is “the reason why the economy seems to have moved from critical to stable is as a consequence of the policy actions that were taken by both the Fed and Congress in the CARES Act,” Hutchins said.

However, the unemployment assistance provided by the CARES Act is expiring soon and we are now facing the second half of the first wave of COVID-19, he said. As we see the number of COVID-19 cases grow in southeastern and southwestern U.S. states, the “prognosis for the number of infections as a consequence of the opening of the economy has gotten worse and that, I think, offsets a lot of the optimism that one might have seen 10 days ago as a consequence of the policy” actions that were taken, he noted.

Disclosure Needs

Tracy Maitland, CEO and president of Advent Capital, called for more standardization of companies’ financial statements so that it is easier for investors to gauge “cash burn” and other liquidity issues to “get a better picture when we’re looking at forward statements.”

Asked by SEC Chairman Jay Clayton, the moderator, what kind of disclosures would make sense for the municipal bond market, Barbara Novick, vice chairwoman and co-founder of BlackRock, said it was hard to say because “if there was ever a part of the capital markets that you can say one size does not fit all, munis would certainly meet that criteria.”

The “variety of issuers as well as the variety of types of bonds makes it kind of a difficult question to have a simple answer,” she said.

She also pointed to the many fiscal issues cities are facing now, saying there is a need to tailor disclosures to what is pertinent in the case of each municipal issuer.

The System Worked

Novick, meanwhile, said she was “very happy that the SEC kept our markets open” throughout the pandemic, even in March, at the height of market uncertainty. The quick actions that the U.S. government took helped prevent a financial crisis, she said.

“On the good news side, the equity markets actually functioned surprisingly well” also, she said, adding the market structure changes put in place since the last recession worked overall, as did the circuit breakers that halted panic selling in March and prevented market crashes, she said.

Exchange-traded funds also “performed the way they should” and “provided a secondary source of liquidity for the bond markets, which were essentially closed,” she said.

COVID, meanwhile, is “advancing a number of trends that were already there but accelerating them dramatically,” including digitization, she said.

Social Issues

Cohn predicted that once the economy stabilizes, corporations are “going to switch very quickly to a lot more of these social issues — the hiring practices, the wage scale, living wages, diversity in the workforce” that we are hearing a lot about now. “It’s here and it’s here to stay and it’s not going anywhere,” he said.

There is also a “humanity issue” that we face when it comes to struggling small businesses, he said. It is important to figure out how to help small businesses survive, he said, noting they were not helped to the same extent as large companies by government policies.

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