Recently the National Bureau of Economic Research (NBER) announced the U.S. has entered a recession, officially ending the longest economic expansion in U.S. history. While this announcement seems somewhat belated given the extreme unemployment numbers and dramatic stock market sell-off, this is a relatively quick determination by the NBER. The last recession from December 2007 to June 2009 was not officially deemed a recession until December 2008, a full year after its official start.
All recessions, by definition, have many things in common. Specifically, “a significant decline in economic activity across the economy” visible in lower real income, employment, retail sales, industrial production, and GDP. Each of those boxes has been clearly checked. And while all recessions have many metrics in common, each one has unique defining characteristics.
While the complete picture of this recession has yet to develop, there are a few details that have come into focus. One is the speed at which this recession has occurred. COVID-19 started getting public attention in January and February, with a coincident global economic shutdown occurring in March. Historically strong employment data transitioned to depression-era unemployment in a matter of weeks. U.S. equity markets ended the decade-long bull market when the S&P 500 dropped 34% in under three weeks, the fastest bear market in history.
Another detail that differentiates this recession from the past two are the hardest hit sectors of the economy. In the last recession Lehman Brothers and Washington Mutual filed for bankruptcy while many other financial companies received bailouts or merged into stronger rivals. Today, we have seen bankruptcies from retail companies like Neiman Marcus, J. Crew, J.C. Penney, Tailored Brands (owner of Men’s Warehouse and Jos. A Bank), 24-Hour Fitness and Hertz. So far, bankruptcies are largely concentrated in the Consumer Discretionary space where some were financially challenged prior to the recession due to their high capital costs relative to online peers. Hertz was also struggling prior to the pandemic due to the rise of Uber and Lyft. Other consumer discretionary companies like airlines, cruise lines and restaurants simply couldn’t be prepared for a forced global economic halt.
The final differentiating detail from the most recent recessions is the size and speed of action taken by the Federal Reserve and Congress in response to COVID 19. The Federal Reserve lowered their benchmark rate to near zero and began purchasing assets in the open market in record time and scale. Congress increased the length and amount of unemployment payments to those who qualify and authorized direct payments to American households. The size of this intervention to date equates to almost 25% of US GDP as can be seen in the chart below:
Fiscal Plus Monetary Stimulus
Source: Charles Schwab, as of 4/29/2020. *Real GDP based on CBO (Congressional Budget Office) economic projections for 2020. Phase 1 provides funding for vaccine, therapeutic, and diagnostic development; Phase 2 provides grants for unemployment insurance, a 6.2% increase in Federal Medical Assistance Percentage (FMAP) for Medicaid, and refundable tax credits for paid medical and sick leave; Phase 3 establishes the Paycheck Protection Program (PPP); Phase 3.5 provides enhancements for the PPP and additional health care enhancements.
Why the “Disconnect” between Equity Markets and Unemployment?
This is a common question. It does seem strange that, at the time of this writing, many equity markets have recovered substantially from their March lows while 29 million Americans are receiving unemployment benefits (compared to 1.5 million in May 2019) and many small businesses are struggling to survive. The easiest answer to this contradiction is the stock market is not the economy. We believe, the better answer is equity markets are forward looking and anticipating better management of the pandemic which is anticipated to lead to improved economic data and corporate earnings. The below chart shows that historically bear markets ending before economic data recovers is typical:
The above “scorecard” shows this bear market has ended in record time. And while it is normal for equity markets to be forward looking and anticipate improving economic data, it appears today’s market resilience is largely due to the considerable fiscal support. This positive market result may be sustainable. However, that is largely dependent on how virus treatments are developed and distributed, and on how successfully local economies function in the interim.
Many are growing weary of the current pandemic and anxiously anticipate a return to normal. We are optimistic this recession and pandemic can be navigated, yet the road will be navigated with elevated market volatility for the foreseeable future. Rest assured, Johnson Bixby will remain vigilant in monitoring economic and COVID-19 developments to help clients continue to plan and pursue their financial goals.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice. This information is for educational purposes only.
There are risks involved with investing, including loss of principal. The securities mentioned are for illustration purposes and are not a recommendation or an offer or solicitation to buy or sell any securities.