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The drastic acceleration in health measures taken to stem the spread of Coronavirus the last several days will now deliver a sudden and severe hit to the economy, regardless of how widespread the illness becomes. Especially when combined with this unexpected global oil price standoff. However, this economic contraction will be temporary, most likely limited to one or two quarters, and it will lead to significantly faster growth the last half of the year and throughout 2021.
Based on everything we gather from our most trusted economists, at this point we believe first quarter economic growth is still likely to remain slightly positive at .5% to 1.5%, followed by a severe contraction in the second quarter in the neighborhood of 10% (most of which will be self-inflicted/mandated). We then expect a strong economic growth surge in the range of 4% to 5% in the third and fourth quarters, and likely continuing through 2021.
A Coronavirus recession may sound like a reason to sell, but it’s not. Only if you can get back in at a lower level, which can be very difficult to do, and the risk of being left behind in a sudden V-shaped market rally (which we think is the high probability outcome) is too significant in our opinion. We much prefer adding to existing positions in a dollar-cost-averaging approach where possible, which we have been doing in our managed portfolios.
Stocks typically start rallying three to six months before economic recovery, and we’re already in that window, so we believe those who sell today are at significant risk of regretting it.
Despite the tremendous amounts of new government programs, cash infusions and interest rate cuts, we have no doubt that investors will remain focused primarily on the figures related to the spread of the virus before turning more optimistic. My hunch is they will soon feel better about declining case numbers, re-opening businesses and economic re-acceleration in China, Hong Kong and South Korea. Followed by the eventual emergence of increasing recovery numbers and declining new cases in the U.S. and Europe, especially as temperatures gradually climb.
Optimism may come from other areas also. Developing news on multiple vaccines in accelerated trials, promising new anti-viral drugs, and growing optimism that drugs from past viral outbreaks may treat Coronavirus (such as readily available malaria and AIDS drugs).
Investors will then start looking across the current valley to the other side and brighter days ahead. But for now, markets appear to be in the process of finding the absolute bottom and building a base, which may take a few more days to a few more weeks. Until then, we expect more of this extreme volatility.