As we enter May and the promise of summer, we are reminded that the current crisis will have a lasting impact on society and our economic well-being. Please consider that a return to some type of daily normalcy is dependent upon several factors.
Economic normalcy is data driven and the speed at which the economy can reopen depends on:
- Covid data, case trends, fear
- Shape of recession – V, U, or W
And a lot is dependent upon:
- Treatments (new or improved)
- Testing availability
When economists discuss a V, U, or W-shaped recession, they are referring to the time or duration with which the economy has slowed and the speed with which it rebounds. Those favoring a fast economic recovery advocate for a V-shaped recession. A U-shaped recession is longer and takes more time to recover. The horizontal line represents time and its length represents economic pain, monetary loss and uncertainty.
If businesses are slow to re-establish themselves as before, stocks could stall, and recovery is anemic. If there is a resurgence in new Covid cases requiring a second shutdown, the economy and markets could head to new lows and a “W” shaped economic outlook.
Weekly data points to consider on the strength of economic recovery:
- Rush hour commuting traffic
- Air pollution levels attributed to manufacturing activity
- The return of retail foot traffic
- Electricity use in manufacturing
- Average work week (manufacturing)
- Average weekly initial jobless claims
Keep in mind that only with a vaccine can we truly return to normal. Without a vaccine, we will be more cautious in our social interactions, avoiding large crowds, cruise ships and airlines.
Anecdotal evidence from Sweden is interesting. Sweden never closed, nor did they issue shelter in place orders. Their economy is still open, but citizens are observing social distancing, working from home, and are cautious about their financial future. They are not spending. Economic activity has declined because of fear and uncertainty.
In a post Covid-19 world we do note some interesting and emerging trends. Over-leverage will have these effects:
- Government tax rates will go up to repay the substantial debt incurred to support our economy
- Tax efficient portfolios will become more important
- Individuals will increase savings rates. This is already occurring in other countries. Due to leverage, individuals will have less disposable income and will save more.
- Companies with too much leverage will be penalized in market valuations. Larger companies with strong financials are faring much better in this crisis than leveraged companies. Well run companies will be rewarded by investors.
- Deglobalization started after the 2008 financial crisis but this trend is now amplified by the current crisis. Nationalism plays into this and will accelerate but the trend did begin before nationalistic fervor caught on in past 5 years. The China - US trade war only highlights the trend.
- Localizing supply chains will accelerate.
- There may be a manufacturing renaissance in US due to these pressures and trends.
- Digital transformation hyper-accelerates the way we work. Faster adoption of cloud technologies enables users to work remotely.
- Central banks are controlling the interest rate yield curve. To support the massive debt issuance, interest rates must remain near zero or at negative levels as we are seeing in foreign markets.
- Stock dividend rates will continue to exceed interest rates on government bonds.
What should investors do?
- Follow your investment strategy and stay diversified.
- Maintain cash reserves for emergencies and upcoming needs.
- Re-balance your portfolio at opportune times to manage investment risk.
- Manage your emotions when making decisions. Remember, investing in stocks for the long-term, is still a relevant mantra.