Recovery Scenarios & Where We May be Headed Next

Matthew Unger |

There is better news coming in. That’s not to say this recession won’t be horrible, and that the loss of life due to this disease isn’t anything short of dire for those affected, but we are beginning to see rumblings of greener pastures ahead, and clouds parting.

While you were busy zooming with family and friends, or maybe watching Governor Cuomo’s daily televised addresses, Bank of America’s Credit and Debit Card data continues to point to stabilization in consumer spending. Based on daily results through April 23rd driven by a breakout of online spending suggest consumer spending may have bottomed. No surprise then that a rally in consumer discretionary stocks ensued. While this is good news that consumer spending has stabilized, it’s unlikely a sustained improvement is here to stay until there is a recovery in the labor market. Driven by the planned partial reopening of several states and trials of Gilead’s remdesivir that have had positive top-line read-outs in a controlled study as markets continue their strong rally.

While 98 of S&P500 companies have suspended guidance as of 5/1/2020, US equity markets continue to rally. We expect the news to get worse, but remember that markets are forward-looking, and have likely priced this all in. In a March clients-only communication, we predicted a contraction of annualized GDP in Q2 of 30%. This still seems likely. We believe the market has already priced this in. We still expect the recession to be the deepest we’ve ever seen, but we expect the duration to be short, and if the markets tell us anything, it’s looking more likely by the day.

We still stand by our call of a “V”-shaped recovery in equity markets, (remember the stock market is not the economy) but caution that a second-wave scenario of new COVID-19 cases in the fall is highly likely, which may cause another dip in the markets, another hit to the economy and another round of stimulus measures by the government. But if we are looking at equity markets, they are telling us this may not be the case, and trying to time the market with an event like this is a fools game.

Maybe we’ll see a “simmering” scenario where we see infections in the nation bounce around in a range for a while until a vaccine is found, or we reach herd immunity, or the virus mutates so much that the infection rate decreases. We aren’t epidemiologists and we aren’t pretending to be. As news continues to develop and as information changes rapidly, hang in there. We are focused on what is going on, while you stay the course. As far as where the market ends the year is merely guessing game. Some estimates are pointing to another 15%-20% upside from here, and this is difficult to forecast considering ~20%+ of SP500 companies have pulled their guidance.

Still, we see the clouds beginning to part. 1) China’s lockdown measures continue to ease, and life is returning back to normal for man in China. 2) This week, states that are responsible for 40% of GDP are easing lockdown restrictions as we look to turn the corner to more normalcy. 3) Many state governments have outlined detailed plans, some with expected dates, as to when companies will be allowed to reopen. 4)Oil has been on the up, with Crude Oil posting five straight days of gains, and 5) countries such as Italy, China and parts of the US showing they’re flattening/have flattened the curve of new infections. 6) As of this publishing, the NASDAQ is now positive for 2020.

What we are saying is, while we are far from the peak of economic activity in February, we are beginning to see increased activity, as mentioned above. You can actually see it here in New York City, arguably the nation’s COVID-19 capital, where one can see more cars on the road, businesses reopening, others preparing to reopen and delays in postal services subsiding than a few weeks ago.

In summary, hang in there, and trust the markets will right themselves. We made it through a major financial crisis before, nuclear warfare, the Spanish Flu and the list goes on. Expect volatility to continue, but remember that upside volatility is good for the markets.