As panic and volatility grip the stock market over the ongoing coronavirus pandemic, we maintain our viewpoint that the U.S. economy should be able to weather the storm and a recession remains unlikely.
Much of the downward pressure in the stock market stems from panicked reactions to measures being taken by the Federal Reserve and U.S. government to quell the spread of the COVID-19 coronavirus, including the European travel ban.
Impact Still Expected to Be Short-Lived
Despite the panic and fear, we maintain our expectation that coronavirus impact to U.S. economic growth will be short-lived. We anticipate GDP to fall by about 0.5% in the second quarter before a rapid recovery in economic activity and growth.
That said, we recognize with the ongoing volatility and anxiety, the economy could experience a longer-than-expected slowdown. Although we do not anticipate a recession occurring, an extended economic slowdown may take longer to return to normal economic activity — likely until Q1 in 2021.
Look Beyond Stocks for Signs of Resilience
While equity markets have fallen dramatically in the wake of the coronavirus crisis, stocks also started from an elevated valuation level. In contrast, the bond market, which has seen a much more orderly and less volatile reaction, reflects a much more resilient outlook for the strength of the economy.
Past Outbreaks Can Be Instructive
Every virus and outbreak is different; however, examining past health crises can be instructive. Periods of high volatility such as what we’re experiencing now usually resolve with higher equity prices in one to two years’ time. In fact, given the aggressive stimulus proposals in the works, we could expect the recovery to be swift when it comes.