Seaborn Hall, 4/28/20
The current bottom line for the US stock markets:
Increased volatility will remain for the next several months depending on multiple factors including, job numbers, unemployment, earnings, GDP, number of small business and corporate bankruptcies, and other factors.
As long as Trump is re-elected, we believe that the US stock markets will continue to recover and approach previous highs within 18 months of the original crisis in early March 2020. The S&P 500 already looks primed to exceed Goldman Sachs forecast of 3000 by year end.
Will There Be More Downside?
Goldman Sachs recently suggested a major support level of 2100 for the S&P 500. At least one other source we know of – Scott Minerd of Guggenheim – has suggested this level as well. Whether or not we go that low – or more – depends on the US success with ‘social distancing’ and ‘flattening the curve’ – and when the nation is able to return to work in some capacity.
Stock markets could take as long as fifteen months to recover from these or lower levels. As we stated in the previous post, we believe it will happen sooner. We believe that, though President Trump, the Administration, the CDC, etc may have made some minor mistakes, that largely Trump’s actions have and will save the United States from many infections and deaths. This appears to be bearing out as the nation as a whole is approaching 60,000 deaths as a variety of states start to re-open. This is way lower than the initial estimates of millions of deaths in the U.S.
For historical context, see our Coronavirus Comparison Page and compare this experience to the number of infections and deaths from H1N1 in 2009-2010 (stock market impact, chart, left). Though we have exceeded H1N1 deaths in a much shorter period, we have not approached the number of reported cases yet.
One caveat is that the contagious effect of Coronavirus is much greater than it was for H1N1 and the fatality rate – at least at present, it usually goes down as more cases are closed – is also greater.
The Big Questions Relative To The Future Of The US Economy And Stock Markets
The big previous question, ‘When do virus levels in the US begin to level off?’ has presently been answered – April 30, an estimate we made here appears to have been a good one. We said that “when this question is answered the markets will begin to stabilize.”
Now that the virus appears to be peaking in the United States, the big question the markets are still looking for is, ‘What type of recovery will we have?’
As we previously said, the first big question relative to the future is ‘What type of recession is this?’ We believe this is most similar to an Event-driven recession. Event-driven recessions typically last an average of 15 months with an average downside of 29%. This market fall has already exceeded that level at least once. Presently markets are down less than 20% from highs.
The second big question relative to the future is, ‘What type of recovery will this be – V-shaped, U-shaped, or L-shaped?’ We believe that we are likely to see a U-shaped recovery, where the markets find a bottom and stay there for a time, but then come out of it with a very fast rise. This is not as quick a recovery as a V-shaped recovery, but it is a much faster recovery than an L-shaped recovery that continues along the bottom with no sustained rise for months or years.
The Bottom Line: Conclusion
Though this virus and the economy shutdown that has resulted is justified and different than anything the US and the world have faced in the past, it is important to put things in perspective:
In 2 months+ the US, by reports, has just over 1 million cases of Coronavirus and just over 57,000 deaths. Even if this reported rate is extrapolated to 7 months it is still much less than 50 million cases. In addition, new reports indicate that the death rate may be much lower than estimated and that many more Americans may have antibodies and possible immunity, Heat and sunlight may kill the virus in short periods of time.
As long as President Trump is reelected in Fall 2020 our long term view of the US stock markets and economy remains the same – largely positive, with the stock market returning to or close to prior highs.
That said, there has been structural damage from this event that has increased the underlying faults in America’s economic framework. A U-shaped recovery could easily turn into a U combined with some variation of an L-shaped recovery. That said, even with a sustained, landmark recovery during the next Administration, due to the monetary and economic solutions enacted to address the weaknesses created by the virus, we will likely experience serious problems in the next decade or more, particularly toward the later part of the 2020’s and the early 2030’s.
For more detail, see “How Do We Interpret This Moment?” Updated 5/01/20
See our Coronavirus And The Stock Markets – And Fear And Panic here.
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