The global COVID-19 pandemic is one of the most difficult human crises we have ever faced. In addition to the tragic human toll, containment efforts and uncertainty have caused significant economic disruption globally and driven stocks into a bear market for the first time in more than a decade. We will get through this, but it can be difficult to see the other side from where we sit today. There is no evidence of a peak in COVID-19 cases in the United States. When new cases begin to stabilize, stocks may make some headway. Until then, market volatility will likely remain elevated.
Initial jobless claims, released every Thursday, is one set of data that may help us determine duration and severity because it gives us an almost real-time view. After sitting at 50-year lows of about 200,000 weekly claims for the past two years, initial filings for jobless claims just jumped to 3,283,000. Over the next four weeks, given the swiftness and severity of the crisis, this record number of initial filings for jobless claims obliterates the near 700,000 peaks of the early 1980s and 2009. The number of job losses may allow markets to gauge the severity of the recession.
In the United States, containment efforts have become increasingly aggressive, which has added to the near-term downside for economic growth and may likely topple the US economy into a swift and possibly deep recession. More than 10% of the US economy has been significantly impacted by the outbreak, including companies tied to travel, leisure, entertainment, manufacturing, brick-and-mortar retail, restaurants, and commodities-related industries. The US economy has been impacted in several ways. It started with supply chain disruptions for corporate America, less demand from Asia, and reduced travel. Next came the hit to energy producers from the collapse in oil prices and reduced consumer spending as people increasingly stayed home. Then came a “negative wealth effect” from stock market losses and tightening credit markets that have been putting additional strain on many businesses. What began as a crisis of confidence has transitioned to a business crisis, and the US economy may shrink by several percentage points during the second quarter as a result. The economic disruption from the containment efforts and the impact to the energy sector may make it difficult for corporate America to grow earnings in 2020. Even with some improvement in the second half of the year as the virus abates, a protracted US recession could mean a flat or slightly negative GDP for all of 2020.
COVID-19 disruptions have likely put much of Europe in recession, and even with a rebound in the second half of the year, any growth this year may be a stretch at this point. Italy has reported more COVID-19 deaths than China and has undertaken extreme containment measures, including shutting down all retail except for drug stores and grocery stores. Neither France, Germany, Spain, nor the United Kingdom (UK) has seen the number of new cases begin to stabilize. Bloomberg-tracked consensus for European Union (EU) GDP growth near 1% in 2020 appears unattainable.
The Japanese economy probably entered recession after a consumption tax went into effect in October 2019, with its fourth quarter GDP contracting by more than a 6% annualized rate. Outbreak containment efforts and weaker export markets may add to the weakness, with lower energy import costs providing only a small offset. We expect the Japanese economy may contract this year, consistent with Bloomberg’s consensus 2020 GDP growth forecast of -0.6%.
With regard to emerging markets, it is difficult to ascertain what is happening in China. India is beginning to implement containment measures. China’s negative impact plus the broader region’s commodity exposure may prevent overall emerging market GDP growth in 2020 from exceeding 3%.
Given current uncertainty, markets may soon look to 2021 expectations to gauge the intermediate-term opportunity in stocks at more attractive valuations. Since investors may have to wait longer for earnings to materialize and we have a US recession that brings corporate earnings down further, we could see a downside scenario on the S&P 500 of 2,200 or lower. That would represent a roughly 35% decline from the index’s record high February 19 and near the average recessionary bear market. At 2,200, the S&P 500 would be trading at a 15–16 P/E based on $140 in S&P 500 EPS in 2020.
We should remember that market bottoms are processes, not points. For now, our best advice for long-term investors would be to stay the course, possibly consider adding equities in appropriate strategies when we determine that the market bottom has formed. We will get through this together, but given the short-term uncertainty, we believe caution is warranted while we wait for evidence that containment efforts are working, and the policy response will be enough to restore investor confidence.
The views expressed are provided for information only and are not to be used or considered as an offer or solicitation to buy or sell securities or investment products. To determine which investment(s) may be appropriate for you consult your financial advisor.
The economic forecast set forth in this presentation may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.
Data provided by LPL Financial, Bloomberg and Reuters.
All investing involves risk including loss of principal.
All indices are unmanaged and cannot be invested into directly.