Economy

The Real Recovery May Not Track Stock Market Euphoria in the Quarters and Years Ahead

If and when an effective vaccine or treatment for the coronavirus arrives, it’s obviously going to come with a big sigh of relief by the world. A successful treatment will act as an economic springboard that is going to bring a lot of economic activity back to life. The problem that exists now is just how much of an economic recovery will be seen.

24/7 Wall St. has been tracking GDP forecasts and other economic forecasts around the pandemic. Unfortunately, the great economy of 2019 will not be seen for quite some time. Just don’t bother telling that to equity investors at this point in 2020. The stock market’s gains have been so swift that almost all of the index losses that were seen in March have somehow magically vanished. With trillions of new stimulus dollars from the U.S., Europe and elsewhere some of those gains could even continue.

One primary lesson investors have known for years is that the economy is not the stock market, and the stock market is not the economy. Markets act to try to discount news for months into the future, looking beyond good times or bad times of today for normalcy in the future. The stock market never really gets it right, otherwise there would be equilibrium and the moves each month would be very limited.

As for the real economy, millions of jobs have been permanently lost as business shutdowns have in many cases moved from temporary closures to permanent closures. Many entrepreneurs now will not be willing to step in and assume a long-term expensive lease at this stage in the game. And who wants to open a business that a city council or a governor can say is not essential without care about the viability of that business or its owners?

One view that was issued by Fitch sums up what the economic recovery’s limited impact will look and feel like. The impact of the coronavirus will be felt for years in terms of GDP. More specifically, Fitch has projected that GDP levels in the largest advanced economies is likely to remain around 3% to 4% below their pre-virus trends even by the middle of this decade. The report cited lasting damage to supply-side productive potential, as well as higher long-term unemployment, lower working hours, and even a slower return to investment and capital accumulation. Fitch is not alone in its views about the long-term recovery being much slower than normal recessions.

The OECD has outlined how there are massive numbers of jobs that be permanently at stake now. Millions of Americans have been tapping their retirement funds, selling at lower values and not being able to get enough back in for retirement. A combined $6 trillion stimulus effort will seriously upset some of the debt hawks as this has to be paid for in perpetuity.

The Congressional Budget Office even warned at the start of July that unemployment in the United States is likely to remain above its pre-pandemic levels for the rest of this decade. It only sees unemployment getting back to 4.4% late in 2030, after having recovered to 7.6% at the end of 2020 and 6.9% by the end of 2022.

One additional risk to the long-term recovery is what happens around U.S. fiscal policies under potential political changes that may come in the years ahead. Some policies may be slower than others, but some already elected officials are pressing for radical changes that have little to no chance of ever being paid for in any form of pay-go model.

Another issue to consider is the longer-term ramifications of climate change. Millions of people believe that the worries about climate change are exaggerated and overblown. Millions of others believe that radical policy changes need to be made now while something can still be done to prevent long-term permanent global issues.

Monetary policy is now looking as though there will be very low interest rates for years. Rates are still negative in much of Europe and Japan. Low rates help offset the impact of ballooning budget deficits, but there will be a new government crisis in the years ahead if interest rates were to suddenly spike higher after so much more debt has been added on.

Investors will try their hardest to look for any good news they can about stocks. Whether valuations go up or down may sometimes just feel like random numbers as investors chase “earnings multiple expansion.” The real economy may look quite different from the stock market in the months and years ahead, maybe even more than it already does.