We are beginning to witness slippage in the economic vitality that has provided the underpinning for the longest running bull market in history. The slippage, detailed in the economic data discussed below, has obviously been triggered by the ever-expanding and deadly COVID-19 pandemic, and the resulting anticipated economic global slowdown. The domestic and global economic sledding will only get significantly more challenging from here as the vital signs of the global economy approach a flatline.
A recession will manifest in coming quarters. It is too early to tell whether Q1 GDP will reflect negative growth, but given the way we are closing our March, I would suggest that a negative initial Q1 GDP reading is likely. Even more likely is that Q2 GDP will be significantly more negative. With 2 consecutive quarters of GDP negative growth, a recession is born.
The real question that investors must confront is significantly larger than simply how long this pending recession will last, though it is a fair question.
There are elements to this upcoming economic meltdown that are familiar, and there are some elements of it that are unique and unfamiliar. Monetary policy, as implemented by the world’s central banks, is exhausted – with rates at or near zero. For the first time in modern history, negative interest rates are the norm in much of the industrialized world. As a result, monetary policy, long a principle weapon used to ignite demand, is no longer as reliable as it has been historically. There are also record levels of debt – corporate, sovereign, and personal. Fiscal stimulus in the form of deficit spending has fueled the largest accumulation of sovereign debt the world has ever seen. Geopolitical dysfunction litters the global landscape as the dream of a European Union and increasingly institutionalized codependence between sovereign states continues to crumble at the feet of the global elite. Emerging economies have fallen prey to slack global demand. Chinese central planners are facing the most challenging economic landscape in post-Mao history. Migrant crisis’ around the world continuously test sovereign will.The world around us feels suddenly and dramatically less secure. It is by any measure.
We have a global economy that was teetering on the razor’s edge of contraction before this COVID-19 emergence. It is as if the pandemic was the straw that broke the camel’s back and triggered what will be a series of tests the world will be challenged to handle.
Clearly in recent weeks there has been an elevated effort to bring all of the coordination possible to leverage the private sector, the public sector, and private citizens to face this pandemic head-on in the United States. State governors, federal officials, the House of Representatives and Senate, the CDC, the HHS, and White officials are all continuing to work on getting a comprehensive and effective game plan in place to stop this pandemic in its tracks and avoid an economic nightmare.
Flickr photo: @thomashawk
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