The coronavirus pandemic and the resulting countermeasures have changed everything. Outside of widespread war, the world has never witnessed such a massive shutdown of business and everyday life. The global economy is in the midst of its worst shock since the 2008 financial crisis (and maybe since the Great Depression). This recession will be deep, painful and rapid. In early March, consensus expectations for 2020 global GDP growth were +3%. Now they are -3%.1 A 6% swing would be unusual over a three-year time period. We just saw one in a month.
As We Look Ahead, Our Views Are Shaped By A Set Of Five Conclusions
1. The COVID-19 pandemic is an exogenous shock, not an endogenous structural break, which means underlying financial and economic health were in good shape before it hit.
2. We are in the midst of an engineered recession as a result of closed businesses and curtailed activity.
3. Until the actual virus curve bends, nothing else much matters when it comes to economic growth.
4. Monetary and fiscal policy stimulus is the most massive response to a crisis we’ve seen since World War II. These actions won’t cure the coronavirus, but they will help the eventual recovery.
5. Stock markets always react quickly to both good and bad news, and bottom before the actual economy does. Financial markets currently are stabilizing while the economy remains in free fall.
And that brings us to our annual 10 predictions: Our original set were thrown for a loop by the degree to which everything changed. We’re going to continue keeping track of (and scoring) our original predictions through the rest of 2020, but in the interest of providing investors with updated and more relevant perspective, we’re also offering a mostly new list that speaks to what investors might expect from here.
10 (Mostly New) Predictions
1. The U.S. and world experience a sharp, but reasonably short recession with noticeable recovery before year end.
2. All-time low yields move higher during the second half, with the 10-year Treasury closing the year above 1%.
3. Earnings collapse, but rise smartly by the fourth quarter.
4. Stocks, bonds and cash all return less than 5% for only the fourth time in 25 years. (No change from original prediction.)
5. The dollar weakens as global growth strengthens in the second half.
6. Value and cyclicals outperform growth and defensive stocks in the second half.
7. Financials, technology and health care outperform utilities, energy and materials in the second half.
8. Active managers outperform their indexes for the first time in a decade. (No change from original prediction.)
9. The cold wars within the U.S. and between the U.S. and China continue. (No change from original prediction.)
10. The coronavirus recession and rise in unemployment cause Donald Trump to be a one-term president.
The Outlook For The Rest Of 2020
The economy will likely experience a slow recovery, but it will recover. The data is likely to be terrible for some time. We’ve been seeing unprecedented weekly unemployment claims, and broader data for the second quarter is going to be horrific. We expect second quarter growth to fall around 25%. The good news is most of the major world economies were in decent shape before the COVID-19 pandemic, and we’re seeing preliminary signs that new infections are slowing in some hard-hit areas.
Investors have been wondering whether we will see a “V-” or “U-shaped” recovery. We think it could be check-shaped, meaning a sharp drop, followed by slow but positive improvement. At this point, we anticipate growth resuming later in 2020 and into 2021, providing a better and more stable backdrop for equities and credit.
Stocks have probably already seen their primary low for this bear market. Bear markets typically occur in stages. First is a waterfall decline. We think that phase may have ended on March 22 when the S&P 500 bottomed at 2,192.1 Technical factors such as a spike in volatility, extreme put/call ratios and a decline in the number of 52-week lows from previous selloffs suggest that was an important bottom. The second stage is a sideways whiplash pattern, which markets appear to be in now. And the third phase is typically a retest of the original low. That said, we expect volatility to remain elevated, but also that markets are starting a recovery process.