I hope this post finds you safe and well.
In this post, I thought I would give you a rundown of some of the latest economic projections as well as a sneak peek of what post-lockdown life could look like for us soon.
You may have seen a headline showing that U.S. economic growth dropped -4.8% in the first quarter after posting 2.1% growth in Q4 2019. The decline was in line with our estimates.
Unfortunately, more bad news is still ahead since widespread layoffs and shutdowns did not hit until late March. Yesterday’s ADP private payroll report showed a drop of over 20 million, the worst job loss in the history of the ADP report.
Here is a projection of what the next few quarters could look like for the economy.
You can see in this chart above that the coronavirus hit the economy like a category 5 hurricane. Q2 could be the worst quarter for GDP growth since the Great Depression.
The arithmetic of recovering from a 30%+ drop in economic growth means that it could take many months (maybe even a few years) to return to pre-pandemic GDP levels.
When discussing portfolios, many of you have heard me say at events or on videos that bad years can hurt worse than good years can help. We use this theory when we construct our investment portfolios. These past two months have been proof of that. It is much easier to come back after a small loss than it is to try to claw back after an enormous slide. This concept is especially relevant if we face multiple waves of coronavirus infection into the summer and the fall.
April 2020 is likely to be one of the worst months for the economy in history, contradictorily, it was also a blockbuster month for stocks. In fact, in my working career of 28 years, there has never been a better month for stock returns.
Why are stocks so disconnected from the economic data?
Fundamentally, a stock’s price is an attempt to put a value on the underlying company’s earnings now and in the future. Normally complicating the calculation are factors like fear, greed, uncertainty, and movements in the overall market.
While economic data looks back at what has already happened (or is happening now), the stock market looks forward to the trajectory of the business environment. Framed that way, the rally is not so unusual since investors are expecting (hoping) things to get better, not worse.
Will the rally continue? Hard to say, but we think you will see a lot of fits and starts until there is more clarity around a future dealing/living with Covid-19. Volatility is very likely to be the name of the game for months and investors need to remain patient. We still have our portfolio hurricane shutters up with the hopes they can start to come down in the immediate future.
Many economists are predicting a rebound in Q3 2020. Are they right?
You know by now that no one can perfectly predict what the recovery will look like. All economic estimates are based on educated guesses about spending, business investment, trade, and other factors. The biggest unknown is “personal consumption” by folks like you, me, your friends, and relatives. As you may know, consumer spending drives roughly 70% of economic activity in the United States.
The pace of the recovery depends on how quickly businesses reopen and consumers go out to shop, eat, travel, and spend money. If people do not feel safe going out or do not feel confident enough to open their wallets, growth could take much longer to come back. This pace will ultimately determine whether the recovery will have a V, U or W shape.
What could life look like as Florida and Charlotte County reopens? While America is just now taking the first tentative steps toward reopening, many countries around the world are farther along, offering us a glimpse of what daily life might look like in a world where the coronavirus remains a threat.
Hong Kong: Restaurants are open, but tables must be spaced farther apart. Good to be open but tough for business.
South Korea: Pro sports are back, but athletes play to empty stadiums. Temperature screening is in place in many buildings.
Taiwan: Schools are in session, but assemblies are canceled, and students must wear face masks in class.
Australia: Beaches are open but sunbathing, picnicking, and large gatherings are forbidden. Basically, they are open to walk on but that is it.
How long will coronavirus precautions overshadow our daily life? Realistically, some restrictions are likely to drag on until a vaccine or breakthrough treatment becomes widely available. On the positive side, the renewed emphasis on handwashing and basic hygiene will ultimately be a positive that comes out of this whole experience. In addition, the success many businesses have had in running their operations remotely will also be a trend that we see continuing after the virus fears abate.
Landsberg Bennett is still hard at work for you during this time, albeit in many different locations. Please feel free to reach out to us either by phone or email if you have any questions. This is an odd time where many people are feeling isolated; please do not let that be you. Whether its financial or otherwise, if you need a set of ears to listen and hear you, we are here.
As always, thank you for the trust and confidence you place in our firm. Have a good weekend and Stay Safe.