US recovery will be strong, says Morningstar

Preston Caldwell | 29 Jun 2020

Page 1 of 1

The Morningstar US Market Index has come thundering back since its late March nadir and is now down merely 7 per cent year to date, even as the coronavirus pandemic persists.

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 (Exhibit 1a).

By 2024, we think US GDP will recover to just 1 per cent below our expectations before the pandemic.

Morningstar forecast a strong long-run US economic recovery

1a US GDP will fall sharply in 2020, but we expect rapid catch-up afterward

U.S. GDP will fall sharply in 2020, but we expect rapid catch-up afterward

Though we agree with consensus forecasts that second-quarter US GDP will be brutal, we're expecting a much quicker recovery. Even while social distancing weighs heavily on some industries, we think the rest of the economy can recover substantially in the second half of 2020 (Exhibit 1b).

1b GDP can bounce back substantially, even while some industries lag

 

GDP can bounce back substantially, even while some industries lag

Retail sales, employment, and other data show that this recovery has already begun for the US. We expect broad availability of a vaccine to erase the coronavirus' direct impact on the US and global economies by mid-2021.

The most important question for investors is what the long-run impact of the pandemic will be on the economy. Our analysis shows the typical stock valuation is drastically more sensitive to the long-run impact on GDP than the short-run impact (Exhibit 1c).

1c Long-run GDP impact is the most important question for investors

 

Long-run GDP impact is the most important question for investors

We've examined the history of global recessions for clues on the coronavirus recession's impact on long-run economic growth and found that many recessions don't have a long-run impact on the economy. The worst recessions in terms of long-run impact (the Great Depression or the Global Financial Crisis) are generally the product of persistent economic policy error.

We've distilled what we learned on what causes recessions to go wrong into a long-run impact scorecard (Exhibit 1d), where we rate the coronavirus' recession.

1d Earlier recessions suggest only a mild long-run hit from the coronavirus

 

Earlier recessions suggest only a mild long-run hit from the coronavirus

Most important, policy response has been extremely impressive, especially the US's historically large fiscal stimulus. Likewise, we think risks of a financial crisis are small currently, as central bankers are unconstrained by the moral hazard quandary.

Underlying structural issues going into this recession pale compared with the economic distortions before the GFC. We forecast a long-run impact on US and global GDP of just negative 1 per cent.

This report appeared on www.morningstar.com.au 2020 Morningstar Australasia Pty Limited

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written content of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.