America is fighting a “world war” on three fronts — health, economic and financial — but the longest bull market in history may not be over yet, Ed Yardeni, investment strategist to top institutional investors and large RIAs, tells ThinkAdvisor in an interview.
Amid a surge of new coronavirus cases in more than 35 states and massive layoffs in what he calls the “lockdown recession,” Yardeni argues that the economy is rebounding — but with “aftershocks.” Plus, the bull market, now more than 10 years old, “may still be intact,” he says.
And the U.S. could be in for “the shortest recession of all time,” Yardeni maintains, provided the recovery continues and with no repeat of the near-national lockdown.
But however short the recession turns out to be, the economy will not return to its 2019 level until late 2022, Yardeni forecasts. He draws a parallel between what he sees as the recovery’s shape and Nike’s check-mark-like “swoosh” logo.
President of Yardeni Research, based in Brookville, Long Island, New York, the economist has spent more than 40 years in financial services, 25 of them on Wall Street with firms including Oak Associates, Prudential Equity Group and Deutsche Bank’s U.S. equities division. Earlier, he worked at the Federal Reserve Bank of New York and the U.S. Treasury.
The strategist, who earned a Ph.D. in economics from Yale University, has, over the decades, forecast Federal Reserve moves, corporate earnings and more than a few booms and busts.
In the interview, he predicts further localized lockdowns in states suffering new viral outbreaks, even as other states continue reopening.
Optimistically, he cites the potential for heavy consumer spending in a financial system now abounding with “an enormous amount of liquidity” resulting from increased savings during the lockdown, as well as cash raised in the securities markets.
ThinkAdvisor interviewed the strategist by phone on July 9. His most recent book is “Fed Watching for Fun and Profit” (March 2020-YRI Press). This intensive Fed watcher and film buff also watches lots of movies and pens reviews of them for his website. Recently, he screened the miniseries, “Chernobyl” and a docudrama on Ulysses S. Grant. Apt fare indeed for the times.
Here are excerpts from our interview.
THINKADVISOR: Is the bull market over?
ED YARDENI: I think the bull market may still be intact. I’m positing that the bull market that started in 2009 may not be over and that, if this melt-up continues, we actually may be entering its last phase.
You’ve in fact called what’s going on in the market “the mother of all melt-ups.” Please explain.
From the bottom, on March 23, to the recent high, we saw the fastest rebound in the stock market we’ve had since two similar experiences in the early 1930s. It’s been extraordinary. But this time around we’re in a strange recession — a lockdown recession.
Explain what’s strange.
The traditional recession, which causes bear markets, is associated with credit crunches. We had one for a few weeks in March, but the Fed came in and carpet-bombed the financial markets with cash.
It was the B-52 carpet-bombing of the economy: The Fed went from bazookas straight to B-52s; they didn’t even bother with helicopter money. It was the most massive and swiftest combination of monetary and fiscal stimulus we’ve ever had.
On March 23, the Fed announced what I call “QE Forever” — and by the end of the week, we had the CARES Act. That has stimulated financial markets, but the jury is still out on what impact it’s going to have on reviving the economy, including bringing jobs back.
You just said that recessions cause bear markets. We’re in a recession. But you aren’t forecasting an imminent bear market. Please explain.
This could very well be the shortest recession of all time if we don’t shut down again and the economy continues to recover. The data I have show that the economy fell into a depression-like recession for two months — March and April — and that by May and June we were starting to rebound.
But the market plummeted mid-February through mid-March. Some said that was a bear market.
We had a 34% freefall of the S&P 500 from Feb. 19 to March 23, and seven of those trading days the market was down by 20% or more from its Feb. 19 record high. It may seem like nitpicking to debate whether or not we want to call that a bear market. Technically, anything over a 20% drop from a peak is classified as a bear market. But I think the bull market may still be intact.
What are your expectations going forward?
The market is doing what it typically does: discounting and anticipating. It has discounted a lot. Now we need to have some confirmation that its perceptions were correct. I’m hoping that the market will consolidate the gains, go sideways for a while and let the fundamentals catch up. We need to prove that the economy and earnings can recover.
What shape of recovery are you forecasting?
I see a Nike “swoosh” recovery — one shaped like the Nike swoosh logo. I’m expecting a 40% annualized drop in real GDP in the second quarter. That’s awful. But then the economy could recover [as much as] 25% in the third and then maybe 5% in the fourth quarter, when it kind of swooshes: The rate of growth slows, and we don’t get back to where we were in 2019 until late 2022.
That’s far off.
But it’s not unusual for recoveries. This is, kind of, par for the course. We won’t get back to that 2019 level [until] we have a miraculous vaccine that everybody thinks is safe and really works — but that’s not likely to happen [soon].
So, then, we’re still rebounding, even though huge layoffs and corporate bankruptcies continue, and the coronavirus is surging again in the majority of states?
The data definitely show that we’re in a rebound, but there are aftershocks. This is where the swoosh comes in. We’re recovering, and the recovery will continue. But this is like a world war — we’ve got the health front, the economic front and the financial front. We’ve made a lot of progress on the economic front and lot more progress on the financial front. But we won’t win the war unless we make some good progress on the health front.
I assume that’s what worries you the most?
The coronavirus isn’t going away. We’re still in the first wave. Clearly what caused the recession was the lockdown. A lot of indicators suggest that we may have bottomed in April, but we’ll see what happens as we get deeper into the summer and what impact the virus outbreak in the South [and other regions] has on the economy.
Do you think there’ll be another widespread lockdown?
I find it hard to believe that we’ll go back to the kind of lockdown we had in March and April, which was devastating for the economy. The aftershocks from the first round of lockdowns are still playing out. But we’ve seen some pretty good recovery from the depths of the April downturn. If we go back and lock everything down again, the damage to the economy would be awful.
Are you expecting limited lockdowns?
Where you see outbreaks, you’re going to see restrictions and localized lockdowns, while other parts of the country will continue to loosen up. Many people don’t seem to realize that the choice is masks or lockdown. Let’s get this wave behind us and if we can’t get a vaccine [soon], buy ourselves enough time so that we can open up the economy in a responsible fashion with a vaccine coming along.
So much of the recovery pivots on consumer spending. What’s the potential?
There’s an enormous amount of liquidity in the financial system. In May, we saw a very strong rebound in retail sales and overall consumer spending adjusted for inflation. That’s been one of the remarkable developments. During the lockdown in April, personal savings soared. Some people who lost their jobs made more on unemployment benefits than what they were [earning] on the job, and they also got checks from the government [stimulus]. On top of that, a lot of people got very nervous and raised cash by selling bonds and equities.
But doesn’t it take time for companies to gear up again and produce supplies to meet all the demand you foresee?
Yes. There’s no doubt this has been an extremely disruptive event — and it’s not over. There will be more aftershocks. The virus is still out there. Dr. [Anthony] Fauci [director of the National Institute of Allergy and Infectious Diseases] said the other day, “We’re still knee-deep in the first wave”; and he’s promoting that states seeing significant outbreaks shut down again. [The following day Fauci said states should “pause” reopening, not shut down.]
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