Outside of jobless claims, current data on broad economic health has been scant and most companies have stopped providing earnings guidance. That has left economists to make estimates during a period that has no precedent. Over the last several weeks, gross domestic product (GDP) estimates have gradually worsened. Here are a few points we think are important to consider:
1. Economic outlook has darkened. A few weeks ago, most economists were expecting to see declines between 10% to 20% of annualized GDP. Now, many estimates are around the 30% annualized mark as long as the partial shutdown continues.1 The only comparable period for this kind of magnitude would be the Great Depression.2 The economic data and earnings for at least the next several months will be quite bad.
2. We have a supply-side recession that could morph into a demand-side recession. Going into this recession, we had strong growth and relatively healthy consumers and households. The country chose to partially shutdown supply to combat the virus. Restarting supply can be easier and done more quickly than restarting after a demand-side recession in which households are weak.3 However, we are operating on an unknown timeline. The market currently seems to be assuming that immunity from/treatments for the virus will allow people to begin trickling back to work sooner rather than later. However, if the supply shutdown lasts for many more months, this very well could turn into a longer demand-side recession with consumers’ savings depleted and households too weak to spend and revive the economy.4
3. Markets are forward-looking. The market is higher today than it was a little more than three weeks ago when the coronavirus news and the shutdowns/cancellations began.5 We know the numbers are likely going to get worse before they get better, but the market is aware of this as well. Historically, markets tend to bottom and begin to recover while we are still in recession. This last happened on March 9, 2009 amid the Great Recession.6
Markets could move lower amid the uncertainty, and volatility is likely to remain high. A common measure of market volatility, the CBOE Volatility Index (VIX), is near 44 and is about three times higher than its long-term average7, so we should continue to expect large daily swings. Health crises in the past have been temporary and we do not think all future corporate earnings should be permanently impaired because of the coronavirus.
If you have any questions about the current market, the economic climate or how your portfolio should be positioned, please contact your Exencial advisor.
Sources:
1. CNBC.com (4/6/20): Janet Yellen says second-quarter GDP could decline by 30% and unemployment is already at 12%-13%
2. Investopedia (3/23/20): What was the Great Depression?
3. Politico (3/19/20): Mnuchin predicts ‘gigantic’ fourth quarter after coronavirus rebound
4. Vox (3/9/20): Coronavirus’s threat to the global economy — and what to do about it
5. Yahoo! Finance (data as of 4/8/20): S&P 500
6. CNBC.com (3/4/19): 10 years ago this week, the market hit the climactic bottom of the Great Recession
7. Yahoo! Finance (data as of 4/9/20): CBOE Volatility Index
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
Created by the Chicago Board Options Exchange (CBOE), the Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors’ sentiments.
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