Joe Zidle is a Managing Director and the Chief Investment Strategist in Blackstone's Private Wealth Solutions group.
Byron Wien is a ninja and vice chairman of Blackstone Advisory Partners.
From Blackstone, July 1:
As the world continues to deal with the effects of COVID-19, racial injustices and rising geopolitical tensions, recent data signal that the worst of the economic damage is likely behind us.
As the world continues to deal with the effects of COVID-19, racial injustices and rising geopolitical tensions, recent data signal that the worst of the economic damage is likely behind us. Data show sequential improvement for most of the world’s key economies, a trend that will probably continue in the short term. Longer-term, there’s an emerging consensus for a quick and complete recovery, but my partner Byron and I have a different view.
We believe that we’re past the cycle low for the economy and the financial markets, and that the recovery is under way. However, we suspect the speed and magnitude of the global policy response are responsible for the rapid transition into recovery mode. In fact, we may end up experiencing the shortest recession in history, beating the brief six-month recession in 1980. COVID-19 is extraordinary in many ways, the market’s ebbs and flows included. The S&P 500® recorded the fastest peak to bear market decline and the fastest bear market exit ever. The Dow Jones Industrial Average recorded the shortest bear market in history at just three days.1
Despite this, we caution people from making the wrong conclusions based on the massive scope of the global policy response, and we advise against annualizing temporary spending programs and one-time payouts. Some forms of temporary spending may become permanent, but we doubt government spending will double in size permanently. In short, we don’t expect a “V-shaped” recovery. We anticipate a recovery cycle that is both unique to COVID-19 and reminiscent of recessions past.
A Recovery Diagnosed
We predict a “square root-shaped” recovery Initially, a “V-shaped” and “square root-style” recovery will look identical. The early phase of the recovery, probably lasting through the summer, will be “V-shaped,” followed by a gradual rise in the fall and beyond. However, we expect momentum to slow after the initial reopening of the economy. The most recent GDP forecast revisions are now projecting that the economy will completely recover 2019 levels by 3Q’21.2 We advise caution on this point; month-over-month or quarter-over-quarter comparisons reflect increases from depressed levels. We believe there is some long-term scarring to the economy, much of which won’t be evident immediately.
For instance, Chapter 11 bankruptcies and corporate defaults have been modest so far. Rating agencies are monitoring indebtedness, and weakness in second quarter earnings could trigger another wave of issuer downgrades. However, bankruptcies typically don’t peak until after a recession ends. Only in hindsight can we fully understand the damage. And we believe that the lockdown’s final toll will be greater than consensus expects.
GDP bounceback a 2022 proposition We don’t expect the economy to return to 2019’s GDP level until 2022. It usually takes several years for the economy’s post-recession recovery to return to its pre-recession pace. Growth rates may look nearly identical after the initial bounce, but as we plot economic activity levels, we see a path below pre-COVID levels for some time to come.
Figure 1: Illustrative Growth Paths for US Real GDP3
(indexed to 100 as of 12/31/19)
COVID cases likely to rise, but not to a “second wave” level that requires a widespread lockdown The highly communicable nature of COVID-19 combined with social-distancing fatigue means that the number of COVID-19 cases should continue to rise during the recovery. However, policymakers now have a greater understanding of how the virus behaves after tracking, to date, more than 2.4 million cases in the US and in excess of nine million cases globally. The policies enacted in the early days of this pandemic were informed by the rapid case growth. Now, real-world evidence based on hospitalizations and ICU capacity is likely to inform more targeted and effective responses to control the spread.
Unemployment will improve, somewhat We expect the unemployment rate to gradually come down to 10%, but we think it will remain elevated for some time as firms permanently close or go bankrupt. More than 30 million Americans were unemployed at the bottom of the recession, and we estimate only around 20 million of them are likely to return to work in the near term. Businesses won’t reinstate 100% of their original workforce to service only 90% of the original demand. Also, in many instances, the lockdown taught companies that they are able to operate effectively with fewer workers........MUCH MORE
