As we approach the end of the quarter with the financial markets, one which has been the best in many years (and on the heels of the worst quarter in many decades), I thought I would share my thoughts about where we are in the Covid-19 recovery cycle and note some possible extended impacts.
- A recovery is underway and I believe we have seen the cycle low for the economy and for the financial markets. We expect to see headline-driven short-term volatility continue in both the stock and bond markets, with those markets overall being relatively directionless from current levels until Covid and other uncertainties (see #8 below) find some clarity. With the Federal Reserve and Treasury Department flooding the economy with cheap money, while headline news is bad, the good news is that this cash must go somewhere and stocks and bonds therefore have some ballast.
- The ultimate recovery will be square root–shaped. The early phase, probably lasting through the summer, will be “V” shaped, followed by a more gradual rise in the fall and beyond. We believe that square-root economy will not reach the level of 2019 GDP until 2022. It usually takes several years for a post-recession recovery to get back to the pre-recession pace.
- We expect Covid-19 cases to increase during the recovery but not to the level that would be considered a "second wave," and not requiring another national lockdown. If squashing regional spikes are required, now having improved medical treatments, the measures will be less draconian than what we have just experienced.
- The unemployment rate will come down to 10%. It will remain that high because of the number of businesses that have permanently closed or gone bankrupt during the recession. More than thirty million were unemployed at the bottom and only twenty million will come back to work in the near term. Companies have also learned during the lockdown that they can operate effectively with fewer workers and less office space. It is possible that a bipartisan infrastructure spending program could improve this somber employment outlook.
- The lockdown has made consumers somewhat cautious, especially in the sports, dining, entertainment and travel industries. Until a cure or vaccine is available, these more hands-on businesses will continue to be restrained; older, vulnerable people will spend more time at home; and the savings rate will continue to be elevated. This will put pressure on interest rates to remain low.
- While remote working and remote learning proved somewhat effective, we believe people want to interact and cross-fertilize ideas with each other. As a result, we expect offices and schools will resume face-to-face exchanges this fall in some form or fashion. Working from home will have a long-lasting impact on both office space (negative) and residential real estate (positive).
- We are making significant progress in managing the symptoms of the disease now, but a vaccine will take time before it is developed, tested, manufactured in large quantities and available widely. Signs are encouraging that significant progress will take place before the end of 2021.
- Beyond the uncertainties created by Covid-19, in the coming months the financial markets will need to digest additional stressors including the current state of social unrest, a contentious governmental environment and a likely season of negative campaigning with unknown outcomes.
Based upon all of this, we feel that a balanced portfolio, as we currently have for most clients, continues to make sense for now. Looking forward we are studying these changing behaviors and business trends and are evaluating their impacts on the workplace, on real estate and on overall financial dynamics. From those considerations, we anticipate making portfolio adjustments in the coming months and will be in contact with you when our strategies are fully developed and ready to be implemented.
As always, please do not in any way hesitate to contact James or me with any questions, thoughts or concerns. Be well.
The views stated in this letter are not necessarily the opinion of First Allied Securities Inc., and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with notice. Information is based on sources
believed to be reliable; however, their accuracy or completeness cannot be guaranteed.