You may have seen references to which letter an economic recovery might resemble. The most popular options are V, L, and U. In a best-case scenario once, governments loosen restrictions and the state economies open up, “V” recovery would emerge. The economy has sunk straight down in the late 1st and 2nd Quarters, and in this scenario it would round quickly. Successful treatment therapies, wide scale testing, continued low interest rates, and improved consumer sentiment is evident in this scenario.
The more likely case, in our view, resembles a “U.” Like the V above, the surge in unemployment begins to reverse in June but the pace of recovery is slower and more measured. Service sector job losses should lead the way, but the pace of recovery will be dictated by the length and form of the health shock. Wide-spread testing, treatments, and a potential vaccine are slower to develop in this case. Manufacturing will be sluggish in its operational re-boot and as they attempt to gauge ongoing demand.
For either scenario above, we see a prophylactic treatment as a huge factor in easing anxiety and improving consumer sentiment. J.P. Morgan is calling the U scenario a “fall, stall, and surge” with the rebound commencing in 2021 when a vaccine is developed. We would not be surprised if the rebound began sooner, such as, in the fall of this year.
We have been a bit surprised by the speed and magnitude of the market’s recovery in April. We foresee a possible pullback in the U.S. equity markets as investors come to understand the depth of the unemployment situation. Remember equity markets are forward looking. Although we see a possible improvement in the economy starting around the fall, investors have underestimated the damage that has been done. We have thirty million people newly out of work, oil markets in distress, corporate profits in a freefall and logically, valuations stretched.
The markets most likely will not overlook all of this. At some point in the not too distant future we’ll probably see the markets drop due to these horrific economic numbers. If there is a retracement, there will be a g
radual return to normalcy, marked by treatments, testing, and hopefully a vaccine. We see a possible return to 2.0%-2.5% GDP trend line growth rate later in 2021, and if progress is evident the markets will react favorably.