J.P. Morgan chief global strategist David Kelly. J.P. Morgan chief global strategist David Kelly. (Photo: Jim Tweedie)

Don’t expect a strong rebound in the economy or an end to the volatility in financial markets until proven treatments are available for COVID-19, followed by an effective vaccine that can be distributed widely, which is not likely before next year. 

That is the dominant view among many economists and strategists despite the Trump administration’s hopes to begin to reopen the economy as early as next month and the massive fiscal and monetary support that has come from the federal government and the Federal Reserve.

The downturn “will last as long as health issues remain in place,” says Michael Geraghty, equity strategist at Cornerstone Capital.

“Better to be patient and cautious, and only restart when it is clear that new infections are declining and testing is sufficiently widespread that new infections can be traced and quarantined,” says Mark Zandi, chief economist at Moody’s Analytics. “The lockdowns have been economically painful, but successful in containing the virus, and it would be a grievous error to open up prematurely and reignite the infections and be forced to lock down again.”

The pain that the lockdowns have caused is apparent in the forecasts for GDP among economists.

David Kelly, chief global strategist at J.P. Morgan Asset Management, expects that U.S. GDP will decline by roughly 5% on an annualized basis in the first quarter followed by a 25% annualized drop in the second, and he’s not even the most pessimistic among economists. Kelly’s outlook forecasts a 7.8% decline in the U.S. economy for 2020, which he says correlates to the worst recession since the Great Depression.

Kelly doesn’t expect a strong recovery until the second half of 2021, after a vaccine is available and distributed widely enough to inoculate 95% of the American public, which will take months.  “Relatively normal earnings” could return by 2022, according to Kelly. 

He is not impressed by last week’s 3% gain in the S&P 500, which suggests that near-term future returns are “gradually being eroded,” said Kelly. 

Geraghty says that the stock market rally “doesn’t make much sense.” It reflects a  “tremendous optimistic outlook” while earnings estimates are “in a complete freefall” making it impossible to know the actual price-to-earnings equation.

Kelly’s colleague, John Bilton, head of the Global Strategy Team at J.P. Morgan Asset Management, said Kelly’s base case for a very gradual economic recovery suggests “caution over risk” for investors. It translates into an allocation that includes cash, longer duration bonds for the short term, and a moderate underweight in stocks.

For the stock allocation, Bilton favors defensive sectors, growth and technology. For corporate bonds he recommends that investors be “very selective” choosing higher quality bonds.

The financial system and markets will come under “renewed pressure” as the downturn continues, says Zandi. The Fed, which has created a firewall against infection by the virus with its multiple credit facilities, zero interest rates and renewed asset purchases, will “surely be tested again once investors actually see the extent of the losses from failures, bankruptcies and defaults,” says Zandi. “That firewall must hold if there is to be a fulsome economic recovery.”

Even if that is the case, Zandi foresees  “something of a slog” in the economic recovery that will follow the distribution of a vaccine, one characterized by “halting growth and high single-digit unemployment … The economy won’t be in full swing and fully recovered until mid-decade.”

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