Why most economists expect a sharp downturn but a relatively fast recovery
For possibly the first time ever economic recession occurring not by accident, but by design. Thanks to Covid-19, the novel coronavirus, employment and production are falling. We want people to stay at home because it is saving lives. The U.S. government and the Federal Reserve are providing unprecedented programs and liquidity to try to mitigate the impact of these quarantines.
I believe many economists view the temporary shutdown of travel and service sectors as a “supply” shock. An analogy being the removal of men and many discretionary services during World War I and World War II. There was a burst of productivity and pent-up demand after both wars when the men returned to the workforce.
The following is a Gross Domestic Product (GDP) forecast by the Wall Street Journal based on surveying a group of more than 60 economists, updated April 9th. The chart shows the quarterly forecasted GDP decline or growth after the 4th quarter 2.1% actual growth figure.
The unemployment increase will be equally dramatic over this period. We should be prepared to be inundated with screaming headlines regarding unemployment and bad economic news until we know third quarter 2020 results. Still, we should not be surprised as this was a conscious public health decision, with the objective to save lives.
The forecasters are pretty much in agreement that the next months are going to be full of economic pain — but there’s a lot less consensus about how quickly the economy will bounce back. Goldman Sachs, for example, is predicting an “unprecedented” recovery in the second half of the year, once businesses start to reopen. The chief of the San Francisco Federal Reserve Bank, meanwhile, says she’s expecting a much more gradual return to positive economic growth. If anything, a recent study suggests that forecasters tend to be too optimistic about when recession recoveries will begin, which means the return to a normal economy could be slower and bumpier than many economists are currently predicting.” (NYT, 4/21/2020, Even Without A Pandemic, It’s Hard To Forecast A Recession)
I believe the recovery assumes a gradual opening of the economy with increased testing and tracing of the Covid-19 virus. Every service or workplace opened will be specially designed to minimize virus transmission and new Covid-19 hot spots will revert back to more severe social distancing. Slowly, we will have better Covid-10 treatments, more people with antibodies and long-term, a vaccine.
My conclusion is that the stock market appears to be looking ahead, and we should stick to our respective target equity allocations and/or rebalance. Historically, equity returns are higher on average after downturns. The headlines about the economy will be distressing this quarter, and this should be old news. It is occurring by design, not by accident.