Cats, Canaries and Vision Charts- The Shape of Economic Recovery
Financial news prognosticators predicting the possible shapes of a bear market and recession recovery in the form of an L, U, V or W can provide enough apprehension to recall the Snellen vision chart or the letters from the hit disco song by the Village People, Y, M, C, A.
Betting on the aftermath of a recession is like forecasting the outcome of a U.S. Presidential election, Cat -5 hurricane, football game or fashion trend. On more positive news, last week boisterous bulls were celebrating the “flattening” of the pandemic curve as well as the possible end to the national quarantine in May.
Man-Made Bear Market
Even with the huge DJIA index 20%+ rally at the top of April, the market has only retraced 45% of the 34% low point of18,591 on March 23rd and is still treading around bear territory. Consider if you lose half your money you need to double what you have left to get back to even. It’s like an optical illusion in the fact it’s easier to lose than gain money.
This “man-made” recession was initiated by literally (and amazingly) shutting down the United States when we were operating at full capacity. This caused a harsh fiscal reaction, like an exogenous shock to the system. Now many bullish financial news prophets are suggesting a quick “V” shaped bounce and economic recovery.
Dead Cat Bounce and Canaries
While we may not have had a crash due to the typical “perpetrators” of over-valuation, over-consumption or over-confidence, the one commonality to past eighteen month (on average) recession hangovers is they bogey of unemployment.
As 70% of U.S. GDP is consumer driven, even if America is “turned back on” by Memorial day, the 17 million people who filed for unemployment thus far (over 11% of the labor force) may be the canary in the coalmine to deter a speedy economic recovery and market rebound.
The market rebound in the beginning of April may have been more of a “dead cat bounce” than an “all clear” sign. A dead cat bounce is a temporary recovery in share prices after a substantial fall, caused by speculators buying in order to cover their positions. Another way to look at this is that investors are “buying on the rumor” and may end up “selling on the news.” Translation: buckle down.
We have not hit U.S. maxim financial fallout from the shutdown (unemployment peak) or maxim consumer and investor sentiment (bearishness), both of which occur at a true bottom. For example, August of 2008 most thought the market had reached the bottom just before Lehman Brothers failed in September. The DJIA index then proceeded to fall more than 30% more before hitting the stated bear market bottom on March 9th, 2009.
Seeing W’s in the Sky
Similar to the 2007-2009 crash and great recession, we may see more of a “W” shaped recovery going out 18 months from the COVID-19 pandemic decline and eventual end to the quarantine. Thousand point 5% or more moves up or down have been, and may continue to be the “new normal” along with ultralow interest rates and inflation.
While the P/E ratios for the US markets are 20% lower since the beginning of the year, it’s important to consider that the world economy outside our borders is suffering as well. (It’s not just about us!) While Americans are very ingenious and self-sufficient, we are just one cog in the 7.8 Trillion world population and global marketplace.
After the worst pandemic of the century subsides (and hopefully does not return in the fall), no one truly knows how large & small business owners will restart, how many workers will be rehired, nor how sales & methods of business will be modified from the pandemic from restaurants, cruise ships and airlines to national sports and music arena events, movies, malls, retail, schools and colleges.
While one may be bullish on the US and world economy in the long run while looking ahead to 2021, in the short term keep an eye on the American psyche of many people that may not get their jobs back and those repercussions – to the half of the economy powered by small business owners that have a personal long road to recovery ahead.
Jobs Report Deciphered
Last week’s jobs report confirmed what investors and economists already knew: work stoppages around the country due to the coronavirus have led to layoffs, furloughed workers, and a rising unemployment rate. The unemployment rate rose from 3.5% to 4.4%, the third largest month-over-month increase since World War II. While this still only puts the unemployment rate at levels seen as recently as mid-2017, it’s clear that this is only the tip of the iceberg.
There are three important considerations for investors when interpreting these numbers. First, data points in the news lag behind what we already know to be the case. It’s not yet clear how high the unemployment rate will rise, although most economists expect it to increase to 10% to 30%. To put these numbers in perspective, the unemployment rate peaked during the global financial crisis at 10% in October of 2009. The exact figures will depend on the length of work stoppages and how successful mitigation efforts are at containing the coronavirus.
Second, given the uncertainty around the public health crisis, the experience of other countries is our best guess at the path forward. Fortunately, there are signs that countries that acted aggressively to contain the coronavirus have been able to return to work. In China, for instance, official accounts suggest that about half of businesses that closed have been able to reopen. As a result, China’s PMI index, an indicator of economic activity, rebounded in March from a steep decline in February. While data from China should often be cautiously interpreted, this is positive for the economy and markets once we are able to get past the peak of the epidemiological curve.
Third, it’s important to distinguish between the one-time hit to the economy from potentially longer-lasting ripple effects. Unfortunately, as we noted above, many have and will continue to lose their jobs as work stoppages continue.
If businesses can safely and responsibly reopen and factories can restart in the next couple of months, it’s possible that many Americans can return to work, reversing the jump in unemployment and decline in payrolls. For instance, furloughed workers – i.e. those who are temporarily laid off – could slowly return to work once their furlough periods end. Thus, while the one-time cut to the economy may be deep, it could bounce back over the following quarters.
This is only the case if work can resume and shops can reopen shortly. The longer the crisis lasts, the heavier the financial burden on individuals and businesses. If businesses shut down due to financial distress, there will be no jobs for furloughed workers to return to.
The Future of the DOW
None of this discussion is meant to minimize the human and societal toll that COVID-19 is causing throughout the country and the world, nor is it to suggest that there will be an immediate snapback or not.
Although the unemployment numbers will continue to rise, and the payroll numbers continue to fall, this reflects what we already know. If and when the coronavirus is contained, and if government stimulus is successful, workers will be able to get back to work as they have done in other places.
However, from an investment perspective, it’s important to remember that markets (stocks) are forward-looking and, in many cases, may be a “leading” indicator to the economy and economic recovery like we saw with the huge bounce back up by the end of 2009.
Stock prices are equal to the present value of all future cash flows that are expected to be generated throughout its years of operation. In translation, if you think the economy will be humming along by summer of 2021, the stock prices may be up and running quite well before then.
The bottom line? Markets, which are forward-looking, will likely factor recovery in long before there is evidence in the economic data. In the meantime, investors should focus on remaining disciplined and ensuring their balanced portfolios match their long-term financial goals.
Even today, diversified portfolios are still working hard to help conserve investors nest-eggs on the downside. This is exactly what balanced portfolios are designed to do across all phases of the market cycle. Thus, in times of economic crises and market uncertainty, it’s important for investors to remain disciplined and consider their financial plans and portfolios. These are all factors that investors can control in the months ahead, regardless of how the fight against the coronavirus plays out.
For more information on our firm or to get in touch with Jon Ulin, CFP®, please call us at (561) 210-7887 or email jon.ulin@ulinwealth.com. Get Started Today.
You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss.
The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities LLC, dba Independent Financial Partners (IFP), and its advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. This report may not be reproduced, distributed, or published by any person for any purpose without Ulin & Co. Wealth Management’s or IFP’s express prior written consent.
