The Short Road Back

It has been almost a year since large swaths of the global economy were shut down, without warning, in an attempt to slow the spread of the coronavirus.  Overnight, a vibrant economy was reduced to a shadow of its former self – unemployment soared, spending declined dramatically, and the stock and bond markets reacted to the uncertainty with stock prices and bond yields both declining rapidly. Many prognosticators even predicted those events would mark the start of another great depression.

Jump forward eleven months and while the economy has not fully recovered, we are well on our way.  Unemployment spiked from 3.5% in February 2020 to a peak of 14.8% just three months later.  By January of this year, we were down to 6.3%.  Although still above pre-pandemic levels, we have closed the gap by about 75%.

Gross Domestic Product dropped by 32.8% at an annualized rate in the second quarter of 2020 only to grow by 38.3% (annualized) two quarters later.  Again, while not at full recovery, these and many other metrics show that we have already recovered 75-80% of the economic activity lost in the downturn.  Despite still having ground to cover to get back to the old highs, we are well ahead of what most expected.

At the same time, equity markets are reaching all-time highs.  Many are wondering how stocks can be at these levels when the economy has not fully recovered.  The short answer is that the markets are discounting mechanisms – they anticipate what will happen six to nine months forward.  They bottomed and turned higher before the economic data bottomed and have remained on an upward trend since.  Absent any unforeseen setbacks, we believe this portends positive economic data into the second and third quarters of this year and likely a new economic expansion.