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Sound Advice: July 8, 2020

Jobs Are Up, But So Are New Infections

Through the spring months, most of the economic data was extremely negative, with record declines in employment and consumer spending.  The speed of that decline had no modern precedent.

We are now in a recession.  

The shortest recession on record occurred in 1980 and lasted just six months.  Second place goes to a seven-month recession in 1918-19, which was tied to the Spanish flu pandemic. 
The big question is: When will this recession end?
Given surprisingly strong data in May, April may have been the bottom of this economic cycle.  If so, it will have been the shortest recession on record.  With massive support from the Federal Reserve, the federal government, and the reopening of previously closed businesses, employment surged unexpectedly.  At the same time, pent-up demand, stimulus checks, and generous unemployment benefits led to a reacceleration of commercial activity.
Still, not all is rosy.  
In his recent testimony before Congress, Fed Chief 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 also recognized the need to keep the virus in check.  “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 reengage in a broad range of activities.”
We are seeing a spike in Covid-19 cases in many states, which is creating a new round of uncertainty.  It has fueled choppier day-to-day activity in the market.  Yet, at least so far, a resurgent market seems to be coexisting with the rise in cases. 
Despite higher infection rates, deaths continue to trend lower.  This reduces fear somewhat and in turn reduces odds of new lockdowns.
Economists give economic recoveries what might be called a letter grade when discussing possible paths.  It’s not the traditional A through F scale.  Instead, the letter intuitively describes the shape of the recovery: V, U or W.
A V-shaped recovery would be ideal, as it would represent a robust bounce.  Might we get a V? The latest data was surprisingly strong and cautiously encouraging.  Still, even during what we might consider normal times, forecasting is difficult.  Today, there’s no playbook and no framework to model outcomes.
I could give you reasons why we may see a strong V-shaped rebound and I could give you reasons why a sluggish U-shaped recovery might take place.  What we hope to avoid is a W.
The strong rebound in stocks since the late-March low is astounding, especially given the economic damage.  Fed support, rock bottom interest rates, the reopening of trade, and stronger economic data have helped.  No doubt, investors are looking past this year’s hit to corporate profits and are expecting an upturn in 2021. 
Simultaneously, the jump in daily cases has renewed volatility, and it bears watching, but it has yet to knock the bulls off course.
Some folks are itching to get back to normal, while others remain on guard against the disease and are taking a more cautious approach.  It may take time for some businesses to fully recover.  Some never will.
Either way, investors are betting that an economic bottom is in sight.
Ultimately, the path of the virus will play the biggest role in how the economic outlook unfolds.

N. Russell Wayne, CFP®


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