Across the globe, the pandemic situation seems to be improving. Many nations continue to struggle with the economic fallout, but case counts and mortality rates hint that things are getting better. In the United States, the first wave of COVID-19 is waning, and many states are looking toward reopening their economies. Public health authorities remain concerned that a second wave of the virus will emerge. Meanwhile, investors are contemplating the possible shape of the recovery. The shape of the economic recovery will depend on how willing and able consumers are to return to their old spending habits.
Employment and Consumer Spending
Prior to the COVID-19 crisis, unemployment was at 50-year lows. Widespread unemployment is an unfortunate effect of the public health measures used to contain the virus. Economic data shows that tens of millions of Americans have already filed for unemployment benefits. The unemployment rate is expected to peak at 20% or perhaps higher. Wise investors know that the employment situation is “old news” as far as the markets are concerned. It is very possible to see the market go up on news that is “less bad” than expected, even while the headlines are bleak.
In times of crisis, Americans have historically reacted by saving a bit more. Many retailers, restaurants, and most entertainment venues are now closed, increasing the savings effect dramatically. In March of 2020, the personal savings rate registered the largest one-month increase on record, and now sits at the highest level in nearly 40 years. The last time the personal savings rate was this high was November 1981. While it is possible this increase in savings is a “new normal”, it is much more likely Americans will rapidly return to their free-spending ways. Using some “walking around sense”, it is not hard to see that most places that people can shop, are full of people shopping. New Year’s Resolutions usually expire a few weeks into January. This new trend of saving will probably last about as long as it takes businesses to reopen, and then consumers will hit the stores with cash to spend.
This Recovery Brought to You by the Letters V, U, L, and W
Investors and the markets are now contemplating what shape the recovery will take. The four most likely possibilities are described as being in the shape of a V, a U, an L, or a W.
- A V-shaped recovery is still possible, but rarely in history is an economic recovery as rapid as the decline.
- A U-shaped recovery is also possible, if fear of the disease keeps consumers home and businesses closed even after restrictions are lifted.
- For much of March, the markets were concerned the recovery would take the shape of an L, a sharp decline followed by a long period of stagnation. The swift public health response, and massive relief and stimulus, make this unlikely.
- If a second wave of the virus emerges, the recovery might take the shape of a W, especially if parts of the economy need to be closed again.
The good news for investors is that government officials and businesses now have much more experience with containment than they did a few months ago. If a second wave emerges, this experience will make future containment efforts more effective and less expensive. In the meantime, sentiment among consumers and businesses alike hint that the recovery will most likely be somewhere between a V and a U.
It is too soon to tell what shape the recovery will take, but we do know that the economy and the markets will recover. We also know that old habits die hard, and US consumers are very likely to continue to spend as they have in the past. For investors in great American businesses, the future is still bright.
Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC, FLMI
Chief Investment Officer