A Very Difficult and Painful Economic Recovery
By Professor Pierre Fournier
The path to economic recovery from the coronavirus pandemic will be difficult and painful, pouring cold water on hopes for a “V-shaped” rebound.
It would be wonderful if some new treatments were developed in the next couple of months. Then, potentially, we would have a V-shaped recovery – a phrase describing a steep market decline followed by a galloping rally. But unless a health-care miracle occurs, it seems that we’re going to have various phases of economic movement, with different parts of the economy turning back on and, maybe, turning back off again. Coronavirus is a health problem that requires a health solution. If a health solution could be developed, I think at least from a market perspective things could rebound quickly.
This gloomy outlook came days after many Canadians & Americans filed unemployment claims for the first time. With most of the world's developing economies on a near-total shutdown to try to stop the coronavirus spread, it is very easy to forecast a very important second-quarter GDP decline and the unemployment rate should easily hit above 15%. The economic decline, which started in the first quarter, is expected to reach its trough in the second quarter. The global economic hit from the coronavirus crisis will likely be many times worse than the financial crisis of 2008 and many countries will see its highest unemployment rate since the Second World War. China's GDP contracts 6.8% in first-quarter showing the first contraction of the economy since it began publishing the data in 1992.
Some analysts offered a more positive take on the economic damages brought by the coronavirus, saying they do not believe the U.S. and Canadian economy or jobs market is in “free fall". Their argument is the uptake on the unemployment insurance program is a good thing because it means you’re getting the transfers to the people that are being disrupted by this health-ordered shutdown. But it is important to understand that with all the rescue efforts from the government's massive economic stimulus and the billion emergency funds package for small businesses will not be enough to cover everyone’s needs. But it is very possible that the government will grant more money in the future to help keep small businesses from folding under the strain of strict social distancing measures being imposed by provinces to contain the spread of the virus.
But no one knows if this support is going to be long enough. Because if we need to have different phases of shutdowns for the next several months or until we have treatment or vaccine, we’re going to need more help than that.
Nevertheless, even if the markets don’t retest their lows — and right now they’d have to slide about 20 percent to do so — I still recognize the potential for volatile swings. Although I have been an active buyer (National Bank and Royal Bank), I remained strategic by adding positions in leading companies that have been beaten up during the downturn, such as Starbucks.
This core franchise is not going anywhere once this is over. Starbucks has reopened most of its stores in China and once social distancing is over here, guess what, people are going to go back to paying $6 to $7 for a coffee.
Disclosure: Stock recommendations presented with this article are solely those of Prof. Fournier. Investors should be cautious about any and all stock recommendations and prior to making any investment decision, it is recommended that you seek advice on stock selection. In addition, investors are advised that past stock performance is no guarantee of future price appreciation.