“So Dorothy, When Do We Return To Kansas?” When Does the Economy – And Life as We Know It – Return to “Normal?”

stock market 2020 - when does the economy return to normal?

We have received numerous calls and emails from clients – some in “panic mode” – over their retirement plans, investments, businesses, and job security. It is understandable and natural to have a sense of fear since we are dealing with a unique virus, COVID-19, which we have never specifically faced before. Yes, we have had outbreaks in the past, including:

  • Severe Acute Respiratory Syndrome (SARS),
  • Avian Flu,
  • Middle East Respiratory Syndrome (MERS),
  • Ebola, and
  • Zika virus.

The coronavirus, however, seemingly has a greater degree of contagion than other recent outbreaks and is impacting our business and personal lives as no contagion or virus has thus far done before. According to the latest figures of Johns Hopkins University’s calculations there are over 2.6 million confirmed cases throughout the world and more than 181,000 deaths.

It’s not just us . . . the coronavirus pandemic has greatly affected everyone on the planet. Even the remote continent of Antarctica, which according to an April 14, 2020 Reuters article is the only continent without a confirmed COVID-19 case. Scientific researchers are in lockdown mode and tourist visits have been postponed. The Reuters article interviewed the maritime governor of Chile’s Antarctica territory, who summed up their living situation as follows: “We are trained to live in isolation, but now with this special condition that has presented itself, we are isolated within isolation.”

Stay-at-home orders and permitting only “necessary” businesses to remain open in many U.S. states have resulted in thousands of companies having to close or substantially reduce their workforce by layoffs or work furloughs. The rate of unemployment in the U.S. has skyrocketed to 22 million according to an April 16, 2020 CNBC article, and could – temporarily – get as high as 25% unemployed.

With all this swirling around it begs the question, “When will the economy return to ‘normal?'” Not being one to stand back from a challenging topic, this month’s newsletter comes from one of the seminars we created and presented in our free five-day webinar series earlier this month. (That series featured 17 subject matter experts called “Will My Business Survive Covid-19?” While it is geared to business owners, many of the topics apply to us all.) 

On Friday of the webinar series, Cameron Killeen, CFA from City National Rochdale, and I co-presented a discussion called “Sharp Decline Ahead, Strong Rebound to Follow”. If you are a visual or auditory learner or want to learn more in-depth information about when we see the economy returning to normal with various charts and supporting information, please watch the video. That presentation is more comprehensive than this article. I also recommend you check out the other topics from the five days of webinars that may be of interest to you. Otherwise, in this month’s “Imagine That™!”, we will tackle some of the key underlying issues concerning this important topic.

Are We Heading For Or – Are We Already IN – A Recession?

Historically, a recession has been defined as “two consecutive quarters of economic decline” and is measured using the Gross Domestic Product of the U.S. (commonly called “GDP”) and monthly indicators, such as a rise in unemployment. The GDP is the total market value of all goods and services produced within the borders of a country for a specific time period.

Today, however, a private non-profit research organization agency called the National Bureau of Economic Research (NBER) officially declares recessions in the U.S. They have a broader and more “holistic” approach as to when a recession occurs. The NBER defines a recession as a “significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” Whew! Try saying all that three times in a row really fast!

So far, NBER has not officially stated that we are in a recession, but many economists believe we are in the early stages of a recession no matter HOW you define it. And, since consumer spending typically accounts for approximately 70% of the GDP – and with 22 million unemployed as of right now – consumers are spending less. No big surprise there. Further, with less consumer spending, this leads to less industrial production, which further leads to fewer jobs, and so the cycle goes. So, in summary – “Yes, Dorothy, we are in a recession!” Of bigger importance, however, is the next question . . . .

How Long will the Recession Last?

The truth is, no one can predict exactly how long this recession – or any significant recession – will last. Looking back at other “event-driven recessions” like this, however, helps us get a fairly good read of what we might expect . . . and with that, make some predictions.

Before we go there, let me give you a 10,000 foot “fly-by” of the four most common “labels” for a recession. I promise it will be very brief, and really, we’ll only “lean into” the one label most noted economists are discussing. Those four “labels” are: “V”, “U”, “W” and “L”.

V & L-Shaped Recessions

The first two labels a recession may resemble are just like you might expect. A V-shaped recession has a sharp drop, followed by an equally sharp recovery. That is the most likely recession for the U.S., despite what the “talking heads” on many major news outlets are spouting. No offense intended to my friends in the media and news world, but their primary goal is to promote fear – and get your eyeballs and mine glued to our screens watching every second of “economic disaster unfolding around us.” Yawn. Turn them off or switch channels. This is not a depression as some in the media are calling it – although at 25% unemployment (briefly), we are seeing a massive – temporary – unemployment we have not seen since the Great Depression of 1929. We will see a sharp drop in the economy – yes – but then a rapid recovery by the fourth quarter of 2020 (and some are even saying perhaps even as early as the third quarter of 2020).

The U.S. economy is simply too strong to have a lasting downward turn such as an L-shaped recession . . . steep drop followed by a continuing recession, unemployment, etc. Not going to happen.

Here’s Why a V-Shaped Recession Is What Likely Will Occur

There are plenty of reasons why a V-shaped recession is being projected to occur:

  • The Federal government has quickly reacted to the situation. Regardless of your politics, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law by President Donald Trump on March 27, 2020, in an incredibly swift response to the economic challenges facing Americans. The bill provides $2 trillion in relief to businesses, organizations and individuals and is the largest-ever economic stimulus package in U.S. history.
  • The Federal Reserve and U.S. Treasury learned from their mistakes. The Federal Reserve learned that sitting on the sidelines during the Great Recession during 2007-2009 was not the correct way to handle the situation. In contrast, this time the Federal Reserve and Treasury ponied up $4 trillion for the U.S. economy to provide liquidity for businesses. Additionally, to keep money flowing through the financial system, the Fed has launched several programs, including targeted financing for banks and businesses and even municipal bonds. On top of all that, the Federal Reserve has just announced it will provide another $2.3 trillion loan facility, mostly to small businesses and municipalities—another demonstration of the Fed’s aggressive commitment to doing all it can to support the economy and our nation’s businesses.
  • Historical data supports a V-Shaped recession. Data compiled by W.E. Donoghue & Co., LLC shows, on average, an event-driven recession such as we are experiencing lasts around 8 months as opposed to “cyclical” and “structural” recessions which are much longer. Also, full recovery takes, on average, just 13 months versus 97 months on average for structural recessions!
  • The history of viral outbreaks also supports a V-shaped recession. According to data compiled from FactSet by City National Rochdale, past viral outbreaks of SARS, Avian Flu, MERS, Ebola, and Zika virus had, on average, a -9% decline in the S&P 500 Index. Within 12 months after containment of the viral outbreaks, however, the S&P 500 Index was up 23% on average – and within 24 months, the index was up 35.4% on average.
  • Best case estimates of the economy for the rest of 2020 show a V-shaped recovery. According to the best case estimates by City National Rochdale, there will be a -35% in the GDP for the second quarter of this year – ouch! – followed by a -3% estimate of GDP in the third quarter – not bad – with a blazing fourth quarter estimate for this year of a 3% increase in the GDP. Nice!
  • Scientists and medical researchers around the globe are busy searching for effective treatments. The drug that currently tops the list of most promising COVID-19 treatments is called remdesivir, which was initially developed to treat Ebola and is manufactured by Gilead Sciences, Inc. There have already been several successful case reports of using remdesivir to treat patients. An April 17, 2020 CNN article mentioned there are at least five ongoing clinical trials using remdesivir, including one with the National Institutes of Health. Kathleen Mullane, an infectious disease specialist who is leading a clinical trial at the University of Chicago said “Most of our patients are severe and most of them are leaving at six days, so that tells us duration of therapy doesn’t have to be 10 days.” Wow!
  • We may even have a vaccine as early this fall for COVID-19. An April 17, 2020 MedicalNewsToday article discussed the efforts of Sarah Gilbert, a professor of vaccinology at Oxford University’s Jenner Institute in the United Kingdom. Sarah’s approach is to use a chimpanzee virus which is harmless to humans to carry the fragment of COVID-19 that is required for immunity. The vaccine will be put in human trials within 2 weeks and if successful, it could be ready as early this fall.
  • The initial mortality projections in the U.S. have been significantly wrong. The initial projection of 100,000 deaths due to COVID-19 has now been revised down by nearly 35%. The University of Washington’s Institute for Health Metrics and Evaluation now estimates 65,976 will have perished in the U.S. by August 4, 2020. Hospitalization rates are slowing thanks to greater testing and observance of social-distancing measures. Further, as more testing is being done in the U.S. (nearly 4.2M tested thus far according to covidtracking.com/data), the mortality projections in the U.S. will continue to be lowered even further as far more Americans have already been infected than thought, but are “asymptomatic” or so mild that they didn’t realize they had contracted the virus. That is, millions of Americans actually already have the virus but have not been harmed by the infection.
  • Newest data suggests 99% of the people who contract the coronavirus will recover from it. Preliminary research from Gangelt, a German town badly infected with COVID-19, is providing further reassuring information. In the April 9, 2020 Reason article, it was reported that German scientists tested 80% of the Gangelt population. They found that approximately 15% of the population tested positive for being infected with the coronavirus. From that statistical analysis, the COVID-19 fatality rate was thus found to be only .37%. For comparison, the U.S. infection fatality rate for the 1918 Spanish flu was around 2.6%. The seasonal flu usually has a fatality rate of .1%, so it bears noting that the coronavirus is roughly three-and-half times as lethal. Still, it is not even close to the 4-6% that many news agencies have been reporting for the U.S. fatality rate. One other positive outcome from the study is that, for those contracting COVID-19, it appears that the rate of reinfection is zero for some period of time.

Conclusion: Only Time Will Tell When Our Economy Will Return to Normal

As provided above, there are a number of reasons why the U.S. economy will likely be seeing a V-shaped recovery . . . sharp drop with an equally sharp ascent, but time will tell when our economy will return to “normal.” We know this for sure . . . the U.S. economic engine has survived the most challenging economic events – short term and long – over time. It will recover, and it usually does far faster than expected.

If you have any concerns about your business, investments, insurance needs, retirement planning or legacy implications as a result of the COVD-19 situation we now find ourselves in – or other reasons – please reach out to us to have a complimentary and confidential conversation about your planning needs. It is possible to have a wealth, investment, retirement, and legacy plan in which you have a high degree of confidence . . . even in trying times such as these. “Imagine That™!

Imagine That™!”

Written by R. J. Kelly – April 2020

Image by stevepb on Pixabay