This month we finally received confirmation of what we already know - U.S. economic activity has declined substantially. As I mentioned a couple of months ago, we were in a very unique position where we knew economic activity was going to decline sharply way before we could see the data to confirm it. While the data is not encouraging, it is backward-looking. Our focus is on the future.
Allegiant’s Economic Dashboard for May shows four red indicators and two green indicators. After flashing three red indicators two months ago, the Dashboard now solidly suggests we are in a recession. It will take some time for the official announcement from the National Bureau of Economic Research (NBER) but make no mistake - the quick decline of economic activity is severe.
Phases of the Economic Impact
The official recession may not last long, but the total economic impact from the COVID-19 pandemic will be much longer. In order to better analyze the impact, we believe it is best to break it into three distinct phases. Phase 1 is the “Severe Decline” phase as many parts of the economy are shut down. This mitigate and contain phase is where we have been for the past 6 weeks. Now we are shifting to Phase 2, monitoring and adapting. During this “Initial Bounce Back” phase businesses begin cautiously reopening. Lastly, we will enter Phase 3, aptly named the “Road to Recovery” phase. Here growth will moderate from the initial bounce-back of Phase 2. During Phase 3 consumers and businesses will adjust to the longer-term reality of the new normal of living through a pandemic.
While there are uncertainties around timing and intensity, we largely know what Phase 1 and 2 will look like. There is much more uncertainty surrounding Phase 3. After the initial bounce back will the economy continue growing? Is it stable and gradual growth or is it lumpy? How does consumer behavior change? How do businesses adjust? Will we have additional outbreaks? What happens to all the newly issued debt? There are many questions to answer over the coming quarters. During this time, it will be more important than ever to examine the new data to identify transition points. As I explained in Quadrants of Possibilities, economic data will remain bad for a while. More important than waiting for good data releases, we are looking for the data to transition from bad and weakening to bad and improving.
Markets are Forward-Looking
Markets have largely priced in the transition from Phase 1 into Phase 2. The intense depression level data of the past couple of months should begin moderating as the economy reopens. While the decline was quick and severe, the recovery will also begin sooner than most recessions.
Stock markets historically bottom 4-6 months before the end of the recession. While this recession will be extremely bad, it may also be short due to the nature of the economic impact. If we assume the official recession only lasts for 2 quarters, then the market bottom on March 23rd could be the real bottom for this cycle. I realize this is a big assumption, assuming the recession is short-lived. But if America successfully reopens over the coming months, then the recovery will begin.
Throughout this market volatility, Allegiant has taken many steps to insulate and protect your portfolios by becoming more conservative leading up to the major declines in March. Those proactive steps created the opportunity to play offense when values were lower. We moved swiftly every step of the way to take advantage of this market disruption. But we aren’t out of the woods yet. The successful transition to Phase 2 is largely priced into markets now. As such, we will be watching very closely and will continue adjusting your portfolios as the situation evolves.
If you would like to see more data and charts about the economy and various financial markets, please click here to view our Monthly Insights book.
Benjamin W. Jones, CFP®, AIF®
CERTIFIED FINANCIAL PLANNER™️
President, Chief Investment Officer, Principal
240 South Pineapple Avenue, Suite 200
Sarasota, Florida 34236
Telephone (941) 365-3745
Toll Free (800) 926-5237
Advisory Services offered through Allegiant Private Advisors, LLC, a Registered Investment Adviser