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How long is long?

Updated: Jul 19, 2023

Anybody have an idea how long these economic shutdowns around the world are going to last?

...Me neither, but recent market weakness appears to be largely pricing in a recession.

The next two weeks will be critical for determining if that’s appropriate: If Americans start dying because we, say, don’t have enough respirators in New York, we may have to re-test last week’s lows and see how things play out. However, given pre-outbreak economic strength and the transitory nature of the situation, we would expect a potential recession to be short in duration, although possibly deep. And then we consider that deeper contractions have tended to be followed by sharper recoveries, and policymakers’ response with stimulus this morning appears to be very aggressive, although arguably a little overdue. Our inclination is still that the next trades will be to add risk to portfolios, not to sell stocks to become more defensive.

Further rationale for investing in stocks can be derived from what we already know. Q1 here in the U.S. is going to be the worst quarter of economic news in more than a decade. That much is clear. And April will probably be very slow-growth, but then we have confidence that things will pick up. We’ll have certain economic tailwinds such as attractive mortgage rates, an enormously accommodative Fed, and low gas prices as we head into the Summer driving months. The fiscal package in the Senate today includes more than $2 trillion of spending and tax breaks to bolster our economy through the coming months, and the Fed, in our opinion, has demonstrated tremendous leadership on monetary policy.

$2 trillion is only 10% of US GDP, though. Is that enough? A shot in the arm of the current economy like this, with cash flowing to individuals and companies all at once, should do the trick and stave off a short-term crisis. Will there be long-term consequences to monetizing this much debt, though? Almost certainly. Given the scale of the crisis we’re facing, there really isn’t any other option, but we’re essentially prioritizing our problems. On the other hand, we’d rather prioritize those kinds of economic problems than have to prioritize patients’ lives, and our situation is just as simple as that.

I expect traders will sell the rally of the last couple of days; the move up strikes me as a lot of short covering. The stocks up the most are those that were hit hardest in the recent drawdown by oil, debt, and social distancing, while better positioned names have underperformed. Infections have not peaked, and we're likely to see another pullback and re-test of previous lows before moving onto a period where economic growth returns to once again take center stage.

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