Tim Hoyle, CFA, Co-Chief Investment Officer
In light of the COVID-19 pandemic and the impact of safety precautions on businesses, we anticipate the economic data during the second quarter will be as bad as any of us have ever seen. Credit Suisse predicts a second quarter decline in Gross Domestic Product of 33%. The St. Louis Federal Reserve placed unemployment estimates over 30% during the coming weeks. As we face the full brunt of the pandemic, the nation is bracing for greater numbers of COVID related fatalities. But, investing is about the future, not the present.
In the future, we are confident American businesses will return to growth and come back stronger. The question is when and where will the economy and stocks find their bottom, and when will the health crisis peak? Obviously, we can’t see the future, but we can make some well-informed guesses based on the latest scientific projections.
The Institute for Health Metrics and Evaluation currently projects reported COVID-19 U.S. fatalities to peak during the final weeks of April. This assumes compliance with current social distancing restrictions through May 1st. While these are merely projections, every day we gather more data to allow the projections to become more accurate. If in fact current projections prevail, we see the future as such:
- The economy will start to get back to work in mid-May, but it will be many months before the entire workforce is engaged and working full-time.
- Economic and corporate data will prove virtually meaningless to financial markets. For the first time in history, asset prices are being dictated by health data.
- Third quarter GDP growth will rebound, but economic activity will still show year-over-year declines through the end of 2020.
- We will see depression-level unemployment, meanwhile government intervention drastically reduces the probability of depression. The Great Depression was exacerbated by higher taxes, more regulation, higher interest rates, and all-out trade wars. Current policy makers have made no such mistakes.
- The economy does not appear ready to bounce back as quickly as we thought a few weeks ago. There will likely be a significant and lengthy healing process.
- The probabilities for a fourth stimulus bill are high. Budget deficits matter less now than ever.
- Small businesses will likely be kept afloat through government assistance, while large corporations will be more reluctant to rely on government funding.
- Corporate buybacks will probably cease in most industries for at least two years, and many corporations will be reassessing their dividend policies near-term.
- The market may retest the lows of March 23, but if health data does not get worse than current projections, those lows could prove to hold.
- Pandemics often occur in waves, which could provide another catalyst for markets to test the recent lows later this year. If a second wave does occur, we anticipate lessons learned during the past month will inform an improved national response. Also, every day we are closer to both a vaccine and proven treatment protocols.