In the early days of the Covid-19 lockdowns, many held out hope that the temporary pause to economic activity would give way to a robust recovery in the second half of the year. It was common to hear talk of a “v-shaped” recovery.
As the weeks drag on and negative economic data continues to flood the airwaves, however, expectations for a swift and strong recovery continue to march lower. The “V-shaped recovery” turned into a “U-shaped recovery,” which in turn has now become a “swoosh-shaped” recovery resembling the Nike logo. The implication of a “swoosh-shaped” recovery is a long, slow, fairly uninspiring return to pre-pandemic economic growth. In all, I’ve been noticing over the weeks that expectations for the economic recovery continue to fall.
And I think that’s a good thing, here’s why:
I am certainly not rooting for a slower recovery – just the opposite in fact. But throughout my career, I have consistently held that equity markets care far less about economic outcomes in vacuums and far more about whether those outcomes exceeded expectations. With investing, it almost always boils down to expectations versus reality. If expectations are low and falling – which I think they are now – it is much easier for the economy to surprise to the upside, producing a favorable outcome for stocks.
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Stocks Rarely Wait for Good News, and Neither Should You!
Taking your cues from the economic headlines of the day can be a costly mistake. There is no way to know exactly when or how the economy will recover, but it is important not to put your investments on hold until it does. Instead of making decisions based on fear and emotions, I recommend focusing on the long-term and making decisions based on data and fundamentals. To help you do this, I am offering all readers our just-released Stock Market Outlook report. This report contains some of our key forecasts to consider such as:
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As part of the swoosh-shaped recovery narrative, there are still many economic dominoes yet to fall. Even as economic restrictions ease across the country, many are saying that fewer shoppers are likely to make their way into stores. Data from April supports this narrative, as U.S. retail sales fell 16.4% from a month earlier, and industrial production recorded its steepest drop in records dating back 100 years. The unemployment rate was at a 50-year low just three months ago, and is now being compared to the Great Depression.2 A decades worth of job gains was wiped out in a single month.
Many American households are feeling the pain firsthand, and many others are worried that financial hardship is coming. In April, Americans’ views on the job market and personal finances declined dramatically. More Americans than ever were worried about losing their job, while a record number also had low expectations for future earnings, income, and spending. Similarly, the small business optimism index recorded its biggest two-month decline in the index’s history, with a majority of small businesses around the country not expecting a rebound for at least six months. The University of Michigan’s index of consumer sentiment fell -26.3% year-over-year, while the index of consumer expectations fell -27.6%.3
Those projecting a swoosh-shaped, U-shaped, or even L-shaped recovery (where the economy essentially never recovers) are using this data to forecast more store closures, business bankruptcies, missed mortgage payments, bad loans, and never-ending Fed bailouts. I am not necessarily saying any of these forecasts will be totally wrong. But if they are and the economy performs even modestly better than any of the in-the-gutter forecasts, then I think stocks will hold up just fine. It’s all about expectations versus reality.
Bottom Line for Investors
On CBS News’ “60 Minutes” last week, Federal Reserve Chairman Jerome Powell said that the economic recovery could stretch into the end of 2021.4 That’s a long time. No one can really say for sure how long the recovery might last, and what shape it will ultimately take. But my take on the matter boils down to two points: 1) The economy will recover; and, 2) I believe it will recover better and faster than most people appreciate, particularly if expectations continue to fall.
Reports this week showed that a company called Moderna produced some positive, early results on a vaccine, which sent some optimism through the markets and airwaves.5 We could very well see sentiment start to shift quickly if hopes for a vaccine continue rising, which could turn my argument in this week’s column on its head quickly. Being overly hopeful and optimistic can lead to disappointment if the outcome is not as good as many expect, which could put pressure on stocks. Again, it’s all about expectations versus reality.
So instead of getting swept up in the negative headlines, I recommend focusing on the hard data and fundamentals. To help you do this, I am offering all readers our Just-Released June 2020 Stock Market Outlook Report.
This Special Report is packed with newly revised predictions that can help you base your next investment move on hard data. For example, you’ll discover Zacks’ view on:
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!6
Disclosure