The U.S. Economy Has Seen The Bottom. Now How Will It Rise?
Weeks of record job losses have left the U.S. with unemployment rates not seen since the Great Depression. In the second quarter, the gross domestic product declined a shocking 33 percent. Every day clients ask us, “Have we seen a durable bottom in U.S. economic and stock markets?”
I am happy to tell them that, despite all the bad news, the leading economic indicators we track signal that yes, a durable economic and market bottom is in. The shortest recession in memory is over. While political wrangling and a wobbly economy driven by ongoing coronavirus fears could lead to periodic bouts of volatility, the backdrop for longer-term investors remains robust.
Now comes the longer economic recovery, shape to be determined – if COVID-19 cooperates.
Three components are necessary for a durable recovery. First, we need broad-based confidence – consumer, business and investor – to drive the economy forward. Next, we look for green shoots, signs beneath the surface that economic expansion is starting to take hold. Third, the alleviation of significant financial stresses. That entire progression happened over the second quarter.
The U.S. Federal Reserve’s (Fed) quick and decisive actions more than restored market function and order. Financial conditions improved as liquidity was restored, primary capital markets re-opened and volatility declined. Thus, recovery is taking hold on Wall Street before Main Street.
Central banks have played a key role in shoring up and encouraging global equity markets, not only the Fed but the European Central Bank and others. We hope – and expect – that they will continue with these important actions.
Government stimulus has played an equally important role, worldwide, and continued Congressional action is clearly necessary. The amount of government support may be shrinking, but it is not going away entirely. Overall fiscal policy should remain accommodative through 2021 and become a modest headwind in 2022. Policymakers likely will continue to find ways to provide support to their constituents so long as COVID-19 remains a major economic threat.
Consumer behavior is not getting worse, which is also encouraging. Buoyed by rock bottom interest rates and the easing of lockdowns, the housing market is showing signs of life with solid improvement in housing starts in May and June.
The next few months could be choppy. The sudden increase of COVID-19 infections in the Sunbelt is a major public health concern.
The recession may be over, but the U.S. economy remains fragile. Recovery could be hard, and long. This will create both risks and opportunities for U.S. equity investors – if they are careful. With so much stimulus in the system, now could be a good time to consider adding exposure to value stocks, which have trailed growth significantly through the selloff and the rebound. Value could see a bid in the short term, especially if manufacturing PMI numbers continue to improve and yields start to climb. But we haven’t seen enough progress to boost the U.S. economy out of its low growth trajectory, which means growth equities should continue to lead over the longer term. In sum, some moderate rebalancing from growth to value at this juncture makes sense.
Jeff Schulze is an investment strategist at ClearBridge Investments, a subsidiary of Franklin Templeton. His predictions are not intended to be relied upon as a forecast of actual future events or performance or investment advice.