July: A bounce in both economic activity and COVID-19 cases

It’s official. We’re in a recession. According to the National Bureau of Economic Research (NBER), which is in charge of declaring recessions, the economic expansion that began in 2009 and peaked in February 2020, is officially over. It lasted a record 128 months.

So now that we’re in a recession, how long can we expect it to last? Well, NBER is already signaling it could be a short one, saying: “The unprecedented magnitude of the decline in employment and production…warrants the designation of this episode as a recession, even if it turns out to be briefer than earlier contractions.”

The shortest recession on record lasted just six months in 1980. A seven-month recession accompanied the Spanish flu from 1918-19. There are five recessions that lasted eight months, including the 1957-58 recession that coincided the Asian flu pandemic.

That recession, tied to the flu pandemic in the 50s, is helpful to consider when looking toward the future now. Why? The recovery was robust. And while the economy is much different today, there are reasons to be hopeful.

Given surprisingly strong data in May, it’s possible we hit the bottom of the economic cycle in April. If so, it would be the shortest recession on record.

While the speed and depth of the declines we saw earlier this year were unprecedented, so too was the recovery we saw in May. Previously closed businesses reopened and reinvigorated an economy already supported by both the Federal Reserve and the federal government. Employment in May unexpectedly surged a record 2.5 million. The private sector fared even better, with a gain of 3.1 million (U.S. BLS).

Consumer spending, which fell a record 6.6% in March and a record 12.6% in April, rebounded by a record 8.2% in May (St. Louis Federal Reserve). Pent-up demand, stimulus checks, generous unemployment benefits, a rise in employment, and reopened businesses supported sales.

Still, the outlook isn’t all rosy. Partly because our outlook is limited. Layoffs, as measured by first-time jobless claims (Department of Labor), are slowing but remain at unusually high levels. The weekly layoff numbers have been more than double what we saw at the peak of the 2007-09 recession.

Forecasting in today’s environment

In late June, Fed Chief Jerome Powell said, “Many businesses are opening their doors, hiring is picking up, and spending is increasing. Employment moved higher, and consumer spending rebounded strongly in May. We have entered an important new phase and have done so sooner than expected.”

But he issued one big caveat: “The path forward for the economy is extraordinarily uncertain and will depend in large part on our success in containing the virus. A full recovery is unlikely until people are confident that it is safe to re-engage in a broad range of activities.”

COVID-19 cases are spiking in many states, which creates new uncertainty. The market is getting choppier day-to-day, but the bull market seems to be holding on.

Despite higher infection rates, deaths continue to trend lower. This reduces fear somewhat and in turn reduces odds of new lockdowns.

U.S. Treasury Secretary Steven Mnuchin was more optimistic with his outlook than Powell. He told Congress, “The Blue Chip Report is forecasting that our GDP will grow by 17% annualized in the third quarter, and by 9% in the fourth quarter.”

That growth would follow what is expected to be record GDP contraction in Q2. Mnuchin also expects significant progress on the employment front.

V-, U-, L- or W-shaped recovery

When we talk about recovery, we often assign a letter that mirrors the shape of the chart tracking it.

A V-shaped recovery refers to a steep decline, followed almost immediately by a steep increase. It represents a robust bounce and is the ideal scenario. Might we get a V? The data in May poits to maybe, but even during normal times, forecasting is difficult. And there’s no framework to model outcomes for this type of uncertainty.

We might see a U-shape… where the economy stays flat for a period, before a dramatic resurgence. Or a W, where we start to improve, but then experience a second dip before a final recovery.

I could give you several reasons to see a strong rebound unfolding. I could also give you several reasons why a sluggish recovery might take place

What about stocks?

The strong rebound in stocks since the late-March low is astounding, especially given the economic damage we witnessed. It suggests investors as a whole are more optimistic.

Fed support, rock bottom interest rates, the reopening trade, and stronger economic data are supporting the rally. I also believe investors are looking past this year and expecting an upturn in 2021.

Ultimately, the path of the virus will play the biggest role in how the economic outlook unfolds.

Some folks are itching to get back to normal, while others remain on guard against the disease and are taking a more cautious approach. The key to July is likely to be patience: Patience as we wait for businesses to recover, patience to see if we really did hit that bottom in April, and patience to see what happens next in the fight against COVID-19.

Table 1: Key Index Returns

Dow Jones Industrial Average 1.7 -9.6
NASDAQ Composite 6.0 12.1
S&P 500 Index 1.8 -4.0
Russell 2000 Index 3.4 -13.6
MSCI World ex-USA* 3.2 -12.7
MSCI Emerging Markets* 7.0 -10.7

Bloomberg Barclays US 

Aggregate Bond TR

0.6 6.1

Source: Wall Street Journal, MSCI.com, Morningstar, MarketWatch

MTD returns: May 29, 2020-June 30, 2020

YTD returns: Dec 31, 2019-June 30, 2020

*in US dollars


I understand the uncertainty facing all of us. We are grappling with an economic and a health care crisis. It’s something none of us have ever faced. We have addressed various issues with you, but we have an open-door policy. If you have questions or concerns, let’s have a conversation. That’s what we’re here for.