Linda S. Parenti, CFA
Chief Investment Strategist
This week’s announcement by the National Bureau of Economic Research that the U.S. officially entered recession territory in March was no surprise. March was when the shutdowns began, unemployment claims skyrocketed, and subsequent economic readings started to fall dramatically.
While it is obvious that recessions are unwelcome, by the time they are officially chronicled, we are often close to their end. The current recession is predicted to be shorter than usual due to its artificial nature and the government’s massive fiscal and monetary support. This perhaps explains why the markets have been in rally mode. As of last week, the S&P 500 had clocked the strongest rebound over a 50-trading day period in history. Even with yesterday’s decline, the S&P 500 is still up over 34% from its most recent low on March 23.
The rally in equities over the past few months may seem like a disconnect from the economy, but as I mentioned in last month’s Market Insights, stock prices reflect future expectations. Both the Federal Reserve and the Wall Street analysts, who forecast the expected growth rates in corporate earnings, predict the second quarter, which ends this month, will confirm the worst results we will see from the shutdowns. Although the economic statistics for May have been grim, overall, they have been better than the figures from April. Unemployment remains very high, but the jobs report from May was a surprising improvement over April. The same is true for our purchasing managers index, which measures the economic activity of a country’s manufacturing and services sectors. Markets tend to put more emphasis on the trend rather than the absolute number, and the trend is currently heading in the right direction.
Even so, the rate of growth in the next economic expansion will likely be modest, and there are numerous risks that could hinder a turnaround. A second wave of the coronavirus could raise fears of another round of closures. This is the reason given for Thursday’s pullback, following reports of rising cases in several states. Likewise, disappointments from vaccine trials could delay the lifting of remaining restrictions. Rising tensions between the U.S. and China could derail the previous progress made with the trade deal. There could also be policy missteps or delays with the additional relief needing approval from Congress.
Despite the long list of concerns, I would disagree with those who warn we are heading towards the next Great Depression. While inflation is below the Federal Reserve’s target, it is still positive and nowhere near the negative, deflationary levels of that era. In addition, there was no Federal Deposit Insurance Corporation back then, so bank failures wiped out the savings for a large portion of the population. Unlike today, the U.S. Government avoided deficit spending during that time. Lessons learned from the Great Recession in 2008 have provided a valuable playbook for limiting the length and depth of the current economic slowdown.
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