Due to the ongoing Covid19 crisis, financial analysts are divided between opinions where some say its gonna be a V-shaped recovery and others argue its going to be a slower U or a W shaped recovery.
The Q1 GDP contracted by 4% and the Q2 GDP (Apr-Jun) is expected to correct anywhere between 25-45% as per most projections due to the countrywide lockdown measures.
The US Cental Bank Federal Reserve has unleashed a slew of measures to inject liquidity by a host of paycheck protection programmes and stimulus checks to unemployed citizens, which has resulted in huge government budget deficits.
Most market analysts who appear on TV simply see no difference between the stock market indices (like the Dow Jones Industrial Avg or the S&P 500 ) and the broader overall economy. So in this post, lets ignore these talking heads and look at two uniquely different predictions made by two very knowledgeable people.
According to author and economic strategist Jim Rickards, economic recovery in terms of GDP is about 3-4 years away as the broader economy has felt the big pinch of the Covid19 crisis, especially with the small and medium sized businesses being hit heavily, giving rise to a never-before-seen record unemployment levels in the United States. If US GDP tanks by lets say 10-20% for the full year, its going to take atleast 3 years to reach the same levels assuming a very high estimate of 10% GDP growth and yet it would still be lower than 2019 GDP levels, same goes to unemployment levels as well. Yet the stock markets are still rising mainly attributed to Fed money printing and govt stimulus rather than fundamentals and earnings. He makes the case that a longtime weak and sluggish economic recovery is no different than a mini depression.
Another research analyst Tom Lee (from Fundstrat Global Advisors) has a contradictory opinion. He claims his firm does 'evidence-based' research and what they have found is post the Great Financial Crisis of 2008, within a short timeframe, most big corporations managed to make a similar 'net income' to pre-recession levels by downsizing and cutting costs though the operating income was 10-20% LOWER than pre-recession levels.
So he makes an argument that the same would happen again and the corporates would employ similar tactics and leverage the latest technology like Machine learning, AI and Blockchain to reduce operating costs by automation.
This could result in earnings beating Wall Street estimates and could trigger a rebound for the indices much faster than expected.
What's even more interesting as per him is that the disposable incomes of Americans in 2020 has increased by an average 5% (that's right, increased !) mainly due to benefits and stimulus checks by the Fed. This has resulted in a high amount of retail investor inflow to stock markets and cryptocurrencies as well. Exchanges like Coinbase and Robinhood have witnessed a high amount of new user signups and surge in trading activity this year.
My personal opinion is markets don't understand the letters of the English alphabet nor the GDP numbers or even the Corporate earnings itself. What really matters is the 'investor confidence' which in turn depends on a host of factors and the perceived risk/return rewards. For instance, if there is a Fed safety net, investors are likely to take greater risk getting into the markets as the possibility of getting 'bailed out' remains on the table.
But the people in the broader economy need to produce goods and services so that the economy can actually function. Its a pipe dream that a large economy like the US can be managed by constantly providing stimulus checks while everybody can just chill at home for prolonged periods with a drink streaming online content. Only when the debt levels, unemployment numbers and inflation rates is reasonably low a society can be more stable and the wealth gap can be reduced.
The Q2 US GDP estimates are going to be released on July 30th.
What do you think is the condition of the economy in general and how in your opinion the recovery would be ? Let me know your thoughts in the comments. Do stay safe during this crisis.
Cheers.
Good analysis thanks for sharing