The Global Economy Roller Coaster Ride
By R. Thayer Tutt, Jr.
2020 began with the U. S. economy entering its 12 th year of expansion and no major correction in the stock market in ten years. Investors navigated a slow-down in GDP of 3% to 2% without debate. Inflation remained contained, and unemployment was steady at record low levels. The Goldilocks scenario of moderate growth, low inflation and declining interest rates continued to support above average equity valuations. With no daily increase or decrease more than 1% in the S&P 500 since October 2019, markets seemed stable.
In late January, news of a deadly virus in China with the potential to spread to the United States upended investor’s optimism and outlook for equities. Although Coronavirus was declared a pandemic by the World Health Organization in February, the U.S. economy demonstrated strong job growth for a record 120 consecutive months, and fourth quarter earnings reports remained positive. Meanwhile, a dramatic rise in COVID-19 cases in Europe, South Korea and Iran began an unprecedented decline in global equities. Equity investors panicked which sent the S&P 500 down 34% from February 20 to March 23. This was the largest decline in the S&P 500 over a 23-day period since 1929. Government purchasing through quantitative easing drove Treasury yields to near zero.
March 2020 was the most volatile month for the U.S. economy since the Great Depression. Unheard-of government-mandated shutdowns aimed to control the spread of COVID-19 caused unprecedented contraction in economic activity. Congress and the Federal Reserve responded with both monetary and fiscal stimulus programs. The $2.3 trillion CARES Act provided unemployment benefits, business loans and direct support to taxpayers designed to mitigate the pains felt by the shutdowns. The Federal Reserve created lending and quantitative easing totaling $7 trillion. Ultimately though, more than 33 million jobs were lost in the United States alone.
The Coronavirus has turned traditional economic principles upside down, including valuations, earnings, growth, interest rates and debt levels. The combination of monetary policy stimulus, the phased reopening of the United States and investors’ optimism for an economic rebound led to a remarkable turnaround in equities in the past few months. The S&P 500 has rallied 37% from March 24 to May 31. The index stands at -5% year-to-date despite the dismal economic reports. Global equities and other risk assets have risen dramatically in April and May. Investors are banking on the likelihood that this pandemic has peaked and the positive reports for a vaccine by the end of 2020. After oil prices fell below zero in April, oil prices have rebounded 64% in May closing above $34 per barrel. The unprecedented liquidity stimulus by the U.S. Federal Reserve continues to keep interest rates at record low levels. Rising equity markets contradict the difficult conditions facing state and local governments, unemployed Americans and continued pandemic concerns. What makes this recovery so unique is that it has rebounded to near prior levels in less than 60 days. Historically after a 30% decline (seven times since 1928), the average recovery has been 6.7 years. If you exclude the Great Depression, the average recovery is 3.6 years.
In conclusion, the economic impact of the shutdown will dramatically upset global GDP growth through 2021. Additional fiscal stimulus and monetary packages are expected to continue. The recession will continue to impact unemployment for several more quarters. Wall Street optimism will be challenged often over the next 12 months. Wall Street and main street remain disconnected posing additional risks as investors navigate the rebound. The global economy roller coaster ride will likely continue into 2021.
R. Thayer Tutt, Jr. is Vice Chairman and Chief Investment Officer of El Pomar Foundation. He is the Chair of the Investment Committee for the United States Olympic Foundation, and also serves on the investment committees for Colorado College and the Geological Society of America. Read more about him here.