Investor Optimism Returning but Prudence Still Warranted

June 8, 2020

Wow what a year this has been for stock markets, and it’s not even half over! The Dow Jones Industrials plunged 38.4% between February 12 and March 23, and in a roughly equivalent span of days rebounded 50.8% to come within 7% of its record high. The drop mirrored the pandemic-induced sharpest recession in 90 years and most abrupt ever. The almost equally impressive market rebound has been inspired by the careful and uneven reopening of economic activities around the world. Markets react to expected conditions six months ahead and so are disregarding current depressed economic trends.

The revived performance of riskier asset prices may not be a case of too good to be true. Far more doubtful is the assertion by the Trump administration that the market rebound heralds a real economic recovery that will be just as steep and just as abrupt as the downturn. At the very least, there are several reasons for being guarded about the economic prognosis.

Number one, economic activity from the start has taken its cue from the epidemiology of the Covid-19 outbreak, and the medical news isn’t very bright. The rates of new infections and deaths may not be rising exponentially as they had been doing, but neither are such receding rapidly. In many U.S. states and many other countries, the rates are still increasing. There’s no vaccine, and no assurance as with aids that one that is both effective and safe will be developed. Success thus far reflects very extreme shelter-in-place restrictions that are now being loosened, and runners, young people, bikers and protesters are widely moving about in public without masks. In the meantime, a nationally orchestrated confidence-boosting infection-tracing system was not put in place during the lockdown.

Number two, the recession of 2020 is remarkably global. The weakness of everybody at once is a very big impediment to anybody returning soon to pre-pandemic economic size. Global growth was faster in the first two decades of the 21st century than in the 1980s and 1990s. Such averaged 3.15% in the 80s, 3.10% in the 90s, 3.89% in the 2000s, and 3.76% in the 2010s. In the period coming into the last recession and in its immediate aftermath, world GDP rose 5.6% in 2007, 3.0% in 2008, -0.1% in 2009 and 5.4% in 2010. Next to 2009, the weakest growth years were 0.6% in 1982 and 1.9% in 1981. By comparison, global real GDP will almost certainly drop 3% this year and even more if resurgent Covid in the second half of the year aborts or impedes the forces of recovery.

Number three, whereas U.S. growth in the 1980s and 1990s pretty much matched average world GDP growth, the same cannot be said for the ensuing two decades. U.S. real GDP averaged 1.9% per year in the 2000s and 2.3% per annum in the 2010s. A wait-and-see attitude by U.S. Republicans on further fiscal stimulus (purportedly to contain the federal debt’s rise)  will commit the same costly mistakes that were made in the late 1930s and again after the Great Recession. Even though distorted downward, the reported U.S. jobless rate in May of 13.3% was higher except for April than in any time since the Great Depression. Stepping on the fiscal brakes now is just terribly ill-advised. Given America’s clampdown against foreign workers and cultural distress, it’s going to be very hard for U.S. growth to outpace the global mean in 2020-22.

Number four, the U.S. election in November represents a watershed in world history not just in the United States but for all nations. The Trump administration has systematically dismantled decades of U.S. leader-of-the-free-world policies. Some of the changes carry existential threats to the entire planet if sustained. It is ironic that the core value of the American Revolution — no taxation without representation — applies metaphorically to all-but-America in November’s political decision. The fate of people all over the planet and of future generations of mankind is at stake, but only Americans have representation, and it’s possibly not going to be a fair contest even for them. With strong political and social forces in play and amid enormous uncertainty in the air, including the danger of Russian interference, it’s easier to imagine growth underperforming than outperforming expectations in the next twelve months.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.





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