As the world continues to deal with the effects of COVID-19, racial injustices and rising geopolitical tensions, recent data signal that the worst of the economic damage is likely behind us. Data show sequential improvement for most of the world’s key economies, a trend that will probably continue in the short term. Longer-term, there’s an emerging consensus for a quick and complete recovery, but I have a different view.
I believe that we’re past the cycle low for the economy and the financial markets, and that the recovery is under way. However, I suspect the speed and magnitude of the global policy response are responsible for the rapid transition into recovery mode.
Despite this, I caution people from making the wrong conclusions based on the massive scope of the global policy response, and I advise against annualizing temporary spending programs and one-time payouts. Some forms of temporary spending may become permanent, but I doubt government spending will double in size permanently. We are also going into a Presidential election cycle so cooperation in Washington is likely to be limited.
In short, I don’t expect a “V-shaped” recovery. I predict a “square root-shaped” recovery. Initially, a “V-shaped” and “square root-style” recovery will look identical. The early phase of the recovery, probably lasting through the summer, will be “V-shaped,” followed by a gradual rise in the fall and beyond. However, I expect momentum to slow after the initial reopening of the economy. The most recent GDP forecast revisions are now projecting that the economy will completely recover 2019 levels by 3Q’21. I believe there is some long-term scarring to the economy, much of which won’t be evident immediately.
I don’t expect the economy to return to 2019’s GDP level until 2022. It usually takes several years for the economy’s post-recession recovery to return to its pre-recession pace. Growth rates may look nearly identical after the initial bounce, but as I watch economic activity levels, I see a path below pre-COVID levels for some time to come.
Figure 1: Illustrative Growth Paths for US Real GDP
(indexed to 100 as of 12/31/19)
Now with COVID-19 spreading again, this has caused several states to rethink how fast to reopen just as the first round of stimulus wears off. The jump in daily cases has created some renewed volatility in the financial markets, and it merits watching, but it has yet to knock stocks off course. Ultimately, the path of the virus will play the biggest role in how the financial market and economic outlook unfolds going forward.
Source: Strategas Securities
Most major stock market indexes are still negative YTD, with technology (NASDAQ) being the one winner. I expect the broad stock market (basis S&P 500) to continue to move higher, albeit with increased swings up and down, to end the year flat at around 3,230 – around 4% higher than were it ended June. I continue to adjust portfolios as I see threats and opportunities.
Table 1: Key Index Returns
Dow Jones Industrial Average
S&P 500 Index
Russell 2000 Index
MSCI World ex-USA*
MSCI Emerging Markets*
Bloomberg Barclays US
Aggregate Bond TR
Source: Wall Street Journal, MSCI.com, Morningstar, MarketWatch
MTD returns: May 29, 2020-June 30, 2020
YTD returns: Dec 31, 2019-June 30, 2020
*in US dollars
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July Calendar of Events (comments and additions for future months are always welcome)
- July is National Picnic and National Parks month – please practice safe Covid-19 steps – crazy to have to say that
July 1st Bureau of Internal Revenue (the IRS) founded in 1862– betcha nobody celebrates this birthday
July 4th Independence Day – it will certainly be a different kind of celebration this year
July 11th My daughter Ryan’s birthday
July 23rd National Ice Cream Day – Breyers vanilla with Hershey’s chocolate syrup is my go-to
I hope you find this information helpful. Please share it with family and friends.
Sources: Blackstone, Strategas Securities, Horsesmouth
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