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Economic outlook: we don't think the market's too optimistic

Preston Caldwell  |  13 Oct 2020Text size  Decrease  Increase  |  
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The Morningstar US market index has staged a complete recovery from COVID-19 and now is up 3 per cent year to date even as the pandemic remains at large.

While many investors are wondering if the market is exhibiting irrational exuberance, we think the rebound has been broadly warranted, as we forecast a strong long-run recovery in the US economy.

We expect US GDP to drop 5.1 per cent in 2020 but surge back in 2021 and experience further catch-up growth in following years. By 2024, we think UU GDP will recover to just 1 per cent below our prepandemic expectation.


US GDP will fall sharply in 2020, but we expect rapid catch-up. Source: Morningstar

While US equities have recovered in aggregate, we've seen very large disparities in share price performance across sectors and companies. Therefore, equity markets are implying a major reshaping of the US economy compared with how it looked before the pandemic.

Likewise, many have argued that the coronavirus will dramatically accelerate ongoing shifts in the economy (such as the one toward e-commerce from brick-and-mortar retail), or that it will create new trends entirely.

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We've looked at several historical episodes in order to best understand the world after covid-19. Our goal is to understand, in general, what happens when the economy is perturbed by an extreme but temporary external shock.

Pandemics are one type of this class of events, but so are wars, political upheaval, and related disruptions. Our analysis shows that UK rationing in World War II didn't depress long-run consumption of rationed goods via a change in habits. Instead, demand for rationed goods generally mounted a full recovery.

While US female labor for participation surged during WWII, this had little impact on the long-run trend. At the very least, these episodes suggest we should think carefully before proclaiming that any aspect of pandemic life will become a "new normal."


WWII rationing had little long-term impact on UK food demand. Source: Morningstar


WWII jump in female labor participation didn't have major long-run effect. Source: Morningstar

About 45 per cent of US workers were working from home at the 2020 pandemic peak. We project that 13 per cent of US workers will be working from home full-time by 2025. This is a solid uptick from prepandemic levels, but it implies that most workers are going to return to the office.

Working from home isn't for everyone. It requires the right occupation, permission from the employer, and ultimately choice of the worker. Only 13 per cent of the US workforce will clear all three of these hurdles.

The market is overrating work-from-home adoption, contributing to our view that energy and real estate stocks are undervalued.


We expect most workers to return to the office. Source: Morningstar

is an equity analyst for Morningstar.

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