Investors like labels for the economy and financial markets—many of them
with the word “great” in them. The Great Depression. The Great Recession. The
Great Lockdown. Well, we’ve moved into what we might call the Great Disconnect.
How can stocks have rebounded so strongly in the last month amid so much
suffering and economic damage? What’s Wall Street seeing that so many on Main
Street are not?
For one, in the United States, all 50 states have already begun to reopen
their economies. In Europe, lockdowns are being eased, following Asia’s lead.
Even gradual progress like this may help the stock market focus more on what’s
ahead than where we are right now.
As lockdown restrictions are lifted, timely indicators like vehicle
traffic, electricity consumption, public transportation use, daily consumer
confidence surveys, and a wide variety of weekly economic indicators point to a
low mark in economic activity in the United States in April. The “Great
Lockdown” recession of 2020 may be over already—although it may not be
officially declared a recession for several more months.
Nowhere to go but up isn’t normally very reassuring, but to the stock
market it may be. Historically, when things have looked their worst, the
opportunity in stocks has tended to be the best. The S&P 500 Index has
usually hit its bottom and started the climb back up about five months before a
recession has ended.
Other factors have helped boost investor sentiment recently. Market
participants have gained confidence from the bold stimulus response from
policymakers in Washington, DC, and the Federal Reserve. The total amount of
the stimulus this year is about 22% of the entire US economy, based on gross
domestic product (GDP). During the entire 2008–09 financial crisis, the total
amount of stimulus was 16.6% of GDP. And there may be more. Surging
unemployment and weakening finances at the state and municipal levels may be
catalysts for more action. Though millions of jobs have been lost to this
crisis, many millions surely have been saved as well.
The medical community also has provided reasons for optimism. Though no
one knows for sure when a COVID-19 vaccine will be ready, rapid progress is
being made, and several promising candidates are now in human trials. Testing
capacity has also ramped up, while some of the best capitalized and most
innovative companies in the world are developing contact-tracing tools to help
facilitate safe re-openings. While stocks may have come a bit too far, too fast
in the short term, markets are clearly responding to these positive
Reopening the US economy will be a gradual process, and temporary
setbacks may be possible. Some of the lost jobs may not return. The possibility
of disappointment as the “Great Reopen” unfolds is real. We are facing a tremendous
challenge, but it is being met with incredible resilience, resourcefulness, and
innovation. Together we will get through this crisis and return to better
times. We expect to return to normal office hours sometime in June. Please
contact us if you have any questions – Mark
The opinions voiced in this material are for general
information only and are not intended to provide specific advice or
recommendations for any individual. No strategy assures success or protects
against loss. Economic forecasts may not develop as predicted. Some of this
research material has been prepared by LPL Financial. All indices are unmanaged
and may not be invested into directly. Referenced material: LPL Financial
letter dated 5-7-2020 by J. Buchbinder, Approved Tracking # 1-05011823.