The market has seemed to recover quickly and is nearly back to even for the year despite the severe market decline in the first quarter.
The decline was enough to usher in the next recession and bring to a screeching halt the longest bull market run in market history. According to the National Bureau of Economic Research, the first quarter 2020 market the beginning of the recession brought about but the sudden economic stop due to the pandemic. However, as we progress into the summer, and are still dealing with an economy that is attempting to be reopened amidst increased numbers of COVID cases, it is unlikely we will have a “V-shaped” economic recovery.
As the economy struggles with sharply higher unemployment numbers due to economic shutdowns, the uncertainty about states reopening plans puts pressure on attempts for the unemployed to gain new occupations. Thankfully, we have a robust unemployment insurance program for the time being, and there are rumors that Congress is working on passing yet another stimulus bill with direct payments to certain citizens. Looking at the unemployment indicators, forward unemployment is stubbornly high.
Economic recovery requires that we approach a more normal level of unemployment to get back to economic growth. The economy certainly has been showing signs of recovery which is great news. When we look at the composite leading indicators (CLIs) for economic activity, we can be encouraged that the CLIs jumped to over 90% in June (lower half of chart below). However, lending weight to the argument against a “V-shaped” recovery is the stubborn lack of counties that are showing signs of economic growth as measured by CLIs (top half of chart below). We need to see countries begin to grow economically to indicate that we are moving out of recession.
If this pandemic persists, monetary and fiscal policy can, and does, help tremendously prevent further carnage. However, these alone are not enough to goose economic growth. We need to get to a place where we can have sustained openings and corporations are comfortable rehiring all the unemployed that want to work.
This market is full of surprises and there are hopeful signs that we are ready to economically recover if companies can function. The unusual nature of this market is driven by the unusual nature of pandemics and political responses. For this reason, we continue to believe that a most likely outcome is a “u-shaped” recovery that takes some time to economically recover from this recession.
Data is going to be important, but so is pandemic responses. Overzealous political responses can strangle a fragile economy. Carelessness can lead to greater social pressure to respond, thus raising risks. Finding that right balance is admittedly a monumental challenge that is surely going to leave large populations frustrated.
The good news is that we have yet to have a pandemic that lasts forever. Sooner or later we will have a viable solution forward and can begin to heal the economy. How we get there is an adventure we did not anticipate but will navigate based on the data.
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