Morningstar’s Dave Sekera, chief U.S. market strategist, and Preston Caldwell, equity analyst, are not of the opinion that the U.S. market is engaging in irrational exuberance. They forecast a strong long-run economic recovery.
Think carefully before proclaiming that any aspect of pandemic life will become a "new normal."
We've seen very large disparities in share price performance across sectors and companies. Therefore, equity markets are implying a major reshaping of the U.S. economy compared with how it looked before the pandemic.
Likewise, many have argued that the coronavirus will dramatically accelerate ongoing shifts in the economy (such as the one toward e-commerce from brick-and-mortar retail), or that it will create new trends entirely.
We've looked at several historical episodes in order to best understand the world after COVID-19. Our goal is to understand, in general, what happens when the economy is perturbed by an extreme but temporary external shock. Pandemics are one type of this class of events, but so are wars, political upheaval, and related disruptions.
U.K. rationing in World War II didn't depress long-run consumption of rationed goods via a change in habits. Instead, demand for rationed goods generally mounted a full recovery. U.S. female labour for participation surged during WWII, this had little impact on the long-run trend.
We expect most workers to return to the office.
About 45% of U.S. workers were working from home at the 2020 pandemic peak. We project that 13% of U.S. workers will be working from home full-time by 2025. This is a solid uptick from pre-pandemic levels, but it implies that most workers are going to return to the office. Working from home is not for everyone. It requires the right occupation, permission from the employer, and ultimately a choice of the worker. Only 13% of the U.S. workforce will clear all three of these hurdles. The market is overrating work-from-home adoption, contributing to our view that energy and real estate stocks are undervalued.
U.S. GDP will fall sharply in 2020, but we expect rapid catch-up.
While many investors are wondering if the market is exhibiting irrational exuberance, we think the rebound has been broadly warranted, as we forecast a strong long-run recovery in the U.S. economy. We expect U.S. GDP to drop 5.1% in 2020 but surge back in 2021 and experience further catch-up growth in the following years. By 2024, we think U.S. GDP will recover to just 1% below our pre-pandemic expectation.
Though we agree with consensus forecasts that second-quarter U.S. GDP will be brutal, we're expecting a much quicker recovery. Even while social distancing weighs heavily on some industries, we think the rest of the economy can recover substantially in the second half of 2020. Retail sales, employment, and other data show that this recovery has already begun for the U.S. We expect broad availability of a vaccine to erase the coronavirus' direct impact on the U.S. and global economies by mid-2021.
The most important question for investors is what the long-run impact of the pandemic will be on the economy. Our analysis shows the typical stock valuation is drastically more sensitive to the long-run impact on GDP than the short-run impact. We've examined the history of global recessions for clues on the coronavirus recession's impact on long-run economic growth and found that many recessions don't have a long-run impact on the economy. The worst recessions in terms of long-run impact (the Great Depression or the Great Recession) are generally the product of persistent economic policy error. We've distilled what we learned on what causes recessions to go wrong into a long-run impact scorecard, where we rate the coronavirus' recession. Most important, the policy response has been extremely impressive, especially the U.S' historically large fiscal stimulus. Likewise, we think the risks of a financial crisis are small currently, as central bankers are unconstrained by the moral hazard quandary. Underlying structural issues going into this recession pale compared with the economic distortions before the Great Recession. We forecast a long-run impact on U.S. and global GDP of just negative 1%.
Vaccine news will have an immediate impact on the market.
In the short term, the timing of vaccine approval is the biggest unknown that has the most significant consequences on the markets. We expect an effective vaccine will be approved over the next few months and rolled out in the first half of 2021. Any change to this timeline or a lack of efficacy of the vaccine would stifle the near-term prospects for the economic recovery.
The election's outcome will not impact the long-term future performance of the stock market for long-term investors as much as where the economy is during the business cycle.
We don’t think that the outcome of the presidential election will significantly alter our valuations or meaningfully change our economic outlook, but we do acknowledge that a contested result and drawn-out ballot counting or litigation would intensify short-term volatility.
If President Trump were to be re-elected, we don’t foresee any significant policy changes and would expect the status quo. If former Vice President Biden were elected, but the Senate remains in Republican hands, we think he would be able to implement some of the policies he has advocated, but the scope would be limited. Finally, if there is a Democratic sweep across the presidency and Congress, then the Democrats would have wide latitude to implement the key Democratic priorities within their platform.
