On the Road to Economic Recovery

The fastest, most economically destructive recession is now in investors’ rearview mirrors. CIO Larry Adam shares his perspective on the unfolding recovery.

This October marks 80 years since the opening of the Pennsylvania Turnpike, the United States’ first highway. Highways have been a critical driver of economic growth due to the connectivity, speed, and efficiency they provide. As Confucius so appropriately stated, “roads were made for journeys, not destinations.”

The last six months have undoubtedly been a challenging journey as the U.S. grapples with the COVID-19 outbreak. While we wish we could have bypassed the pandemic and its accompanying twists and turns, investors have learned that it is critical to focus on the road ahead rather than the rearview mirror. The virus understandably caused us to reroute our original 2020 outlook, but we are confident there is light at the end of this unwelcome COVID-19 tunnel. We may not have hit the last bump in the road just yet, so adhering to a disciplined investment strategy will be of the utmost importance if you wish to arrive at your destination, achieving all your goals and objectives.

The road to recovery has been under construction since real-time activity metrics bottomed in April, and the U.S. economy has improved from the severely depressed levels experienced during the shutdowns. Now, with the fastest and most economically destructive recession in modern history behind us, third quarter GDP is revving up to grow 25-30%—the best quarter of growth on record. Despite this, there are still many miles to go before the size of the economy returns to pre-COVID GDP levels (forecast of approximately -3% GDP for 2020, accelerating to about 2.7% in 2021). The recovery is unfolding in a K-shaped pattern, where different parts of the economy recover at dissimilar paces and magnitudes. This expectation is cemented by our assessment that the pandemic inherently favors certain sectors and indus­tries more so than others, allowing certain companies (e.g., e-commerce, medicine, air freight) to enter the express lanes while forcing others (e.g., airlines, hospitality, leisure) to wait until the COVID-19 gridlock clears. Ultimately, a vaccine could alleviate this congestion and the lingering psychological impact of the virus, but even if a safe, effective candidate is approved by year end (80% - 90% probability) it would likely only be available for certain subsets of the population (e.g., medical professionals), with widespread distribution not occurring until mid-2021.

The pandemic’s prolonged impact makes it increasingly impor­tant for Congress to pass a Phase 4 fiscal stimulus deal that bridges the economy to more normal times. Jobless claims remain elevated, with much of the lost wages occurring in the lower income brackets. However, the recent bounce in economic data combined with Congressional leaders’ continuing resolution to fund the government through December 11 has resulted in a roadblock in negotiations, likely postponing a deal until after the election. In contrast, the Federal Reserve has performed ongoing maintenance to its already accommodative monetary policy in order to support Main Street, which includes holding short-term interest rates at zero through at least 2023.