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 \u201cv-shaped\u201d recovery.<\/p>\n
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 \u201cV-shaped recovery\u201d turned into a \u201cU-shaped recovery,\u201d which in turn has now become a \u201cswoosh-shaped\u201d recovery resembling the Nike logo. The implication of a \u201cswoosh-shaped\u201d recovery is a long, slow, fairly uninspiring return to pre-pandemic economic growth. In all, I\u2019ve been noticing over the weeks that expectations for the economic recovery continue to fall.<\/p>\n
And I think that\u2019s a good thing, here\u2019s why:<\/p>\n
I am certainly not rooting for a slower recovery \u2013 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<\/em> exceeded expectations. <\/em>With investing, it almost always boils down to expectations versus reality. If expectations are low and falling \u2013 which I think they are now \u2013 it is much easier for the economy to surprise to the upside, producing a favorable outcome for stocks.<\/p>\n 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.1<\/sup> A decades worth of job gains was wiped out in a single month.<\/p>\n Many American households are feeling the pain firsthand, and many others are worried that financial hardship is coming. In April, Americans\u2019 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\u2019s history, with a majority of small businesses around the country not expecting a rebound for at least six months. The University of Michigan\u2019s index of consumer sentiment fell -26.3% year-over-year, while the index of consumer expectations fell -27.6%.2<\/sup><\/p>\n 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\u2019s all about expectations versus reality.<\/p>\n Bottom Line for Investors<\/strong><\/p>\n On CBS News\u2019 \u201c60 Minutes\u201d last week, Federal Reserve Chairman Jerome Powell said that the economic recovery could stretch into the end of 2021.3<\/sup> That\u2019s 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<\/em> recover; and, 2) I believe it will recover better and faster than most people appreciate, particularly if expectations continue to fall.<\/p>\n 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.4<\/sup> 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\u2019s 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\u2019s all about expectations versus reality.<\/p>\n","protected":false},"excerpt":{"rendered":" In the early days of the Covid-19 lockdowns, many held out hope that the temporary pause to economic activity would […]<\/p>\n","protected":false},"author":3,"featured_media":4785,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-7767","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7767","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=7767"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7767\/revisions"}],"predecessor-version":[{"id":8750,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/7767\/revisions\/8750"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=7767"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=7767"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=7767"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}