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Second-Half Recovery? Don't Bet on It

Written by Briton Ryle
Posted March 30, 2020

It's pretty clear by now that the coronavirus isn't "just the flu." And the delayed U.S. response isn't winning just yet. Infections continue to rise, more restrictions are being put in place to slow the spread, more businesses are shutting down, and more people are losing their jobs...

Americans are settling into the notion that this is gonna take a bit longer than we originally planned. Early last week, my son's high school said it was staying shut till April 27. Last night, the president extended the shut-in till April 30.  

But there's one assumption that hasn't really been challenged yet (at least not publicly): the party line that says the U.S. economy is going to stage a strong comeback in the second half of the year, after the virus is done with us. 

Administration lackeys like Treasury Secretary Steve Mnuchin and economic advisor Larry Kudlow continue to forecast that we'll be all good sometime this summer. I believe the president said "rocketship."

I typically prefer a little more detail in my economic forecasts. And a track record of being somewhere in the vicinity of reality can be nice, too...

Head in the Clouds

So, over the weekend, I took a little time to see what Goldman Sachs analysts thought would get us market stabilization: “[First], a sign that the policy intervention is sufficient to prevent severe second- and third-round economic shocks; a sign that the infection rate is reaching a peak; a sign that the economic downturn may be slowing; and cheap valuations... In reality, we believe it will be a combination of these, and in some cases there are already signs these are in place..."

Oh really? And which of these magical milestones are in place? Well, the latest word on infection peak is that we might get one — in two to three weeks. And then you still gotta wait another two weeks, which makes it just about May... so no, not that one.

Maybe its policy intervention. Well, for corporations, sure. They can borrow cheaply, and the Fed plans to buy their bonds to help them raise cash. But American citizens? Yeah, $1,200 bucks... that you'll get in maybe three weeks...

Three goddamn weeks. I saw Mnuchin say it on Face the Nation yesterday with my own eyes — like it's something to be proud of. Congress and the administration both seem a bit detached from the struggles of the average American. This could become a big problem if politickin is more important than doing what's right.

Anyway. 

We are two weeks into this isolation/social distancing thing. The first week, 3.28 million people lost their jobs. The next unemployment report comes out this Thursday. You can bet it will be at least that many again. And then we'll have four more unemployment reports before there's a realistic chance that we can belly up and have a beer together in our neighborhood bar.

If that neighborhood bar doesn't go belly up first...

Early last week, Mnuchin said U.S. unemployment might hit 20%. Later in the week, St. Louis Fed guy James Bullard said 30% unemployment is possible. Oh, and a 50% drop in U.S. GDP. 50%!

Again, I'm going to defer to the track record and go with Fed guy. 

The American workforce is right at 165 million strong — well, 162 million after that last unemployment report.

During the financial crisis, unemployment hit 10%, and that was a disaster. Today, we're talking about a disaster three times as big...

Did Somebody Say "Rocketship"??

To get to 30% unemployment that means 49 million Americans out of work. If that happens, if it gets that bad, the bulk of it will come over the next few weeks. 

That is an unprecedented shock. 

U.S. GDP is a bit over $21 trillion. And Congress just approved a $2 trillion Band-Aid. 

bigger boat

Analysts have factored in a 20% drop in earnings for S&P 500 companies. A little bird is telling me that, internally, companies are game-planning for 40%. 

Now look, I could be wrong. Maybe there is room for all of us on the rocketship. But I can tell you this: Wall Street, Congress, and the administration are not going to tell you that this scenario is really bad and that a quick recovery is a pipe dream. After all, they have wealthy clients and donors to take care of first, and there's only so many seats on the rocket... better to let the little guy take the hit, just like 2008–2009.

I've told you that doing a little buying at these levels is the right thing to do (I've mentioned Bank of America down around $20, Chewy around $29, Slack under $20). And I stand by that. Because the one condition for market stability that Goldman Sachs might be right about is that valuations are low.

Of course they can get lower. I expect them to. That's why we should all employ a buying program that incrementally doles out a little buying power. Every week, every month, whatever works. And you probably want to allocate your buying over a six-month period. 

Buckle up.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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