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A U.S. Economic Contraction And Bear Market Highly Likely

Summary

  • A significant contraction of US economic activity in 2Q 2020 is now virtually assured.
  • Although a full-fledged multi-quarter recession is not certain, the pathway to escape this outcome is very narrow, indeed.
  • My best-case scenario for US stocks is a peak-to-trough decline of roughly 31%.
  • Full-fledged recession scenarios - according to severity and length - will most likely entail US equity market declines of greater than 50%.
  • Looking for a helping hand in the market? Members of Successful Portfolio Strategy get exclusive ideas and guidance to navigate any climate. Get started today »

For reasons described in this article, a significant contraction in US economic activity in the second quarter of 2019 is highly likely. Furthermore, a bear market in US equities, associated with this US contraction and a broader global recession, is highly likely.

An Economic Contraction is Virtually Certain in 2Q 2020

If you are personally inclined to think that COVID-19 poses economic threats that are not significantly greater than the flu, then I strongly urge you to read this article. By reading this article you will come to understand that COVID-19 poses massive threats (which are not yet widely understood by the public) to the economy of any area of the world in which there's a major outbreak.

Various areas around the US are currently on the verge of major outbreaks, and these actual and potential outbreaks already are having serious economic impacts. These impacts will only grow in the next few months.

I will briefly review the factors that will drive a US economic contraction in 2Q 2020.

1. Global economic recession. I highly recommend that you read this article in order to understand why a global economic recession driven by severe recession in China is now a certainty. This global economic recession will have major direct and indirect spill-over impacts on the US economy, via supply, demand and impacts on the financial system.

2. Investment freeze. As a result of disruptions in both supply and demand, producers and entrepreneurs will cancel or otherwise postpone planned investments. A collapse in non-residential investment expenditure will likely subtract 1.0% to 1.5% from GDP in 2Q 2020. The only real question is: How severe or for how long?

3. Manufacturing contraction. Major global supply chain disruptions, particularly out of China, will induce a major contraction in activity in the US manufacturing sector – and all of

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This article was written by

James A. Kostohryz profile picture
23.99K Followers

James A. Kostohryz has 20+ years of experience as a global financial professional. He has worked as an analyst at one of the world's largest asset management firms covering emerging markets, banking, energy, construction, real estate, metals and mining. He has also served as Global Portfolio Strategist and Head of International Investments for an investment bank. He is currently managing JK Investment Consulting, a firm specializing in global portfolio strategy, macro forecasting, and quant analytics.

James is the leader of the investing group Successful Portfolio Strategy, a service designed to empower investors to achieve investment performance through implementation of a portfolio strategy system. Features include: 2 model portfolios, tactical asset allocation and mentorship for execution, analysis via video and articles, and more. Learn More.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (458)

R
When is this retest of 2350 going to happen? Still waiting here. Looks like he missed the mark on this one.
Dale Roberts profile picture
Thanks @James A. Kostohryz My guess is as well that things will get much worse before they get better. I knew this would get bad, but certainly not this bad.

I was essentially out first on the internet, ha, with how to prepare your portfolio for the coronavirus outbreak. Feb. 1, two weeks before the market collapse. ESP I guess ... :)

cutthecrapinvesting.com/...

That said, for those who have a long term time horizon this is likely a wonderful investment opportunity under very unfortunate circumstances. Even buying the market.

Dale
massimo zagati profile picture
I agree with the 50% minimum drop. The Problem is not the death rate but the hospitalization rate that is 10%. 5% require intensive assistance. This thing will halt the economy
P
@massimo zagati - "halt the economy"

Or overwhelm the healthcare system (5% mortality). It's a choice the government will make. I'm guessing halt the economy. We'll find out in the next month or so.
bboren1 profile picture
Just found this
And on Wednesday the Japanese drugmaker Takeda Pharmaceutical Co. said it was developing a new coronavirus drug derived from the blood plasma of people who have recovered from Covid-19. Its approach is based on the idea that antibodies developed by recovered patients might strengthen the immune system of new patients. trades TAK
bboren1 profile picture
If vaccine not here by next fall, hopefully drugs will be known to treat it and we will have purified blood plasma from people who had it and recovered to use on those that get sick. Virus seems to be not that lethal for people under 50. Out of the 80k infected in China 65k have recovered. Probably more people will live in the US this year just by washing their hands more and not getting the common flu. Next year expect more people to get flu shot wash their hands and flu deaths to be cut in half. If we have over 10,000 deaths a year from this virus I would be surprised. I predict more people will die from the flu in US this year than from this virus. More people will die from car wrecks. Its good to take the precautions we are doing, but the precautions may hurt the economy more than needed. For example why can't they televise the NCAA and other sports without the crowds until this blows over. Just feel this is way over blown and the economy is being hurt by fear, not reality. China total deaths only 3,177 out 1,5 billion people. USA only 41. Over 100 people die in car wrecks every day in USA. I am buying here.
M
You are indeed SEVERAL steps ahead of others in COVID19-related circumstance. Ignorance of the investment community in general is just frightening. Exponential spreads are not something to belittle about. Too many are being complacent and succumb themselves into status quo bias. But not everyone is like that and there are people like you around, so I kinda see hope...
James A. Kostohryz profile picture
Trump to declare National Emergency. So is Trump exaggerating? Just the flu?
Chris Lau profile picture
I stand corrected. I poked at you for having an downside article that did not age well (the SPY rose 1000 points that day, yet another head fake). You said to give it a few weeks (or months). Turns out market only needed a few days.

Anyway our COVID-19 long hedge worked out and will continue to do so ($INO $MRNA). Markets influx of money will find its way there. Gov't should be spending all resources on epidemiology and virus spread prevention, not propping up stocks.
James A. Kostohryz profile picture
Hi @Chris Lau:

Sign of a good man....

Best of success to you!
w
I am not a subscriber, although I am thinking about it. In the meantime, today was my best ever in the markets with an increase of about 25% in my trading accounts. I have over 40 put options positions that I bought in the past four weeks. The best gains are 1530% on Spy 337 put options and 850% on Carnival Cruise Line puts. One reason that I have been so bearish is that I am a retired biology professor with some expertise in modeling the effects of diseases and epidemics on wildlife populations.
James A. Kostohryz profile picture
@wrdemott1 I have certainly noticed that everybody that I know that has serious knowledge of epidemiology were taking this crisis more seriously that politicians, market participants, or even other doctors.
T
@James A. Kostohryz

You did not need serious knowledge of epidemiology to freak out. Having even a basic knowledge of statistics was more than enough.

I went 100% market neutral in the last days of January and I agree that we are still quite far from the bottom.
A
James, a couple of other people I know also warned about the virus's impact on markets, but you're the only one I know who has stayed bearish the whole time. Great call.

You expect stocks to go lower. What would be the signs that a bottom is near?
James A. Kostohryz profile picture
Great question, Alex. I think the market needs to go through a "public panic" stage. Today was only day one of this. Panic selling by the public will get worse in next two weeks. I have an article submitted for publication on this which should come out tomorrow.
James A. Kostohryz profile picture
Folks, if you haven't already, please take a look at my service. My subscribers are doing really well. I not only told people when to sell, I will tell you when to buy and what to buy: seekingalpha.com/...
P
@TigerLady - Thanks for the links.

The problems are getting enough confidence it works, and producing enough, fast enough. This should hit the US, in force, in a few weeks. Just not enough time.
47977204 profile picture
Disagree that this virus has staying power.

What is the most important questions on this virus? Will it keep spreading or is it only a winter virus only? What temperature does the virus die out at? How hot do you need to heat your food to kill it? Not any answers supplied by the governments.

One thing is for sure, the Coronavirus is not the same as an Influenza virus. For example ,the HINI is an Influenza virus type A (Orthomyxovirdae), not a Coronavirus (Coronavirdae). They have very different genomes and other factors. Influenza viruses have 6 to 8 single string RNA strands for their genome whereas Coronavirus has ONE single string RNA long strand.
Many things can cause "flu", even bacteria. No Coronavirus in history has ever had sustained deadly effects anything like the "Spanish Flu" Influenza virus. If this current infection does continue to cause massive health problems through the Spring/Summer it will be the very first time, but it could happen. I believe that it will be easier to upset the replication of the one long RNA strand of Coronavirus and good results from clinical trails are predicted to be present very soon.

It looks like it is only a colder weather virus for mass transmissions. India has enough people to populate the entire world and often does not use modern sanitation practices. The number of people infected in India is 60 which is 0.00000 % of their population. The infections in Italy are highest in Northern Italy, etc. So to me it is a winter virus only for mass transmissions and sometimes cold weather viruses don't even return in significant numbers the next year.

For what's it worth I am starting to nibble at buying some stocks. People will still buy and sell regardless of this infection which will be old news in the future. Note also that the number of people worldwide doing the buying and selling is increasing at a very high rate.

Of course until Spring/Summer this virus must be feared as it viciously attacks your lungs.
@47977204
Nice to know you are a medical professional and not just some witch doctor reading the bones.
simeonchambers profile picture
James- You were spot with the article, and I commented as such over the weekend. The delusion is still there for many. Today was the rip your face off rally late in the session, which we all knew would happen. Reality sets in tomorrow.

I was thinking. In my 30 years of trading, have I ever seen a "debt holiday", like in Italy right now? Umm no, we never saw that. This is the lunacy of the bulls these days. We had tape bombs all over today and AAPL was up 7%. Oh, the pain that is coming is beyond belief for the fools that laughed at you over the weekend. We are not even close to a bottom when a country can have a "debt holiday" and the National Guard can be called to help in a NYC suburb, among other tape bombs. Free money everywhere if people know what i am talking about. Only risk is governmental intrusion to affect the timing of the put option expirations. Closed markets are the only real risk here for the next few days.
James A. Kostohryz profile picture
I told my subscribers today before the close that I was expecting a potentially face-ripping bear market rally. Typically, bear market rallies are very intense and can last for weeks. However, in this case -- even though it could be a big one -- it will probably only last a few days, at most. You can see how I will trade it, for potentially very big profits, here: seekingalpha.com/...
Michael Bryant profile picture
I 100% agree! Relief rally that won't last.
w
I am not sure why, but I like to make money on the short side, mainly with put options. Over the years I have gained and lost a lot of money buying puts. At least you can't lose more than 100%, unlike futures, short selling and selling options. My trading accounts are up about 40% YTD. I plan to take profits today on SPY options that expire on Friday, but I will keep the rest. Trading this way is stressful, but my employer retirement accounts are invested in 50% in equities and I have protective puts on longterm stock holdings (e.g., MSFT) I don't need to worry about them. The tricky part is switching from long to short and vica versa in a timely manner.
R
James. Why didn’t you consider the good option for achieving the S & P 500 - goal 666? :) Good number. Хорошее число.
K
This is crazy people. What people fail to realize is that driving their car puts them at far more risk. $1.2 Million people died last year from auto accidents, over 1300 per day. Yet people still get in them. So far we had 8 deaths from this virus and everyone stays home. Go figure. LOL
m
Review your remarks a year from now - I don't think you'll be of the same opinion. Do the math. With a pandemic at it's early stage - deaths so far being compared to last years deaths (< 50,000 BTW, not 1.2 million) is a logical fallacy. 50,000 deaths are USA numbers, suspect that your 1.2 million quote is worldwide numbers.

(Edited)
James A. Kostohryz profile picture
Ignore people telling you to "buy the dip". Right now, you need to be looking to "sell the rip" You need a strategist that can help you discern when and what you should be looking to buy:
seekingalpha.com/...
t
How much is a sub? Looking on your website not seeing pricing. Maybe I am missing it?
James A. Kostohryz profile picture
Hi @toomuch1 . I think this will take you to the landing page: seekingalpha.com/... $49 per month with a big discount for annual subscription.
C
No mention of the gilead drug results that Are about to be released in the next week. This drug has already been approved for safety. So if shows positive result in efficacy it’s ready to roll.
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