6 New Predictions For A Post-COVID Economy
- I am updating my macroeconomic predictions, looking ahead to a post-COVID economy.
- For the virus, I am predicting a second wave in the fall, but the economy will muddle-through without as much disruption.
- I am adding predictions that inflation will remain subdued and 10-year yield will remain low through the end of 2020.
- I predict the forward multiple on the S&P 500 will remain high and the index will regain its highs by mid-2021.
With economies around the world re-opening, it’s time to start thinking about what the post-COVID world will look like.
My investment philosophy for navigating macro events is to create a narrative guided by specific, verifiable predictions.
Focusing on verifiable information rather than emotion-driven opinion helps remove bias from the investment process. My initial macro article on 3/10 helped readers understand why S&P 500 earnings in 2020 would likely fall to $140, which would drive the index to 2,400 or below. This was controversial as 2020 estimates were $175 at the time, but estimates have now fallen to $134. My 4/1 article then helped readers understand why aggressive policy action and a near-zero risk free rate meant that the 3/23 lows on the S&P 500 were likely the bottom – a prediction that has held up so far.
For this particular crisis, I have created a narrative for the virus itself, for the economy, and for the market. Today, I update these narratives to include predictions for the post-COVID economy.
Regarding the virus itself
I expect April to be the height of the crisis in the northern hemisphere but then worsen in the southern hemisphere in May-August and re-emerge in the northern hemisphere in the fall. The world will have to endure partial or periodic forms of social distancing until an effective treatment, vaccine, or widespread testing becomes available. By Q4 2020, life in the Western Hemisphere will begin to have recognizable daily rhythms, though certain social changes will persist and have economic ramifications. We will, in essence, muddle through a second wave of the virus with far less disruption.
I am adding a prediction that there will be a second wave of deaths in the U.S. between October and December of this year. However, I am also predicting that the number of states with stay-at-home orders will be less than 10 on 11/15.
Exhibit 1. Predictions Regarding The Virus, Treatments, and Social Response
Regarding the economy
From the get-go, I have called for a GDP decline in Q1 with sharply negative growth in Q2. This has now become consensus. In the U.S., I expect sequential improvement in Q3 and Q4, and positive real GDP growth beginning in Q4 2020.
Beyond GDP growth, post-COVID economic thinking needs to consider the risk of rising inflation, the level of interest rates for “risk-free” assets, the relative strength of the U.S. dollar, and permanent structural changes instituted in response to the pandemic threat and its social ramifications. My narrative is as follows:
- Inflation will rise to problematic levels only if income inequality subsides, a rationale discussed eloquently in a recent Lyall Taylor blog post. The drivers of more equality could be a swing to redistributive political policies, which the COVID pandemic does seem to be nudging forward. However, it will likely take time and some election cycles to reach this point. In the near-term (i.e., the coming year), I expect inflation to remain subdued.
- Subdued near-term inflation and aggressive monetary policies suggest “risk-free” interest rates will remain very low for an extended period.
- I expect accommodative monetary policy to ultimately weaken the USD, though contravening forces suggest the path to a weaker USD will not be smooth.
- I anticipate some lasting structural changes that will have implications for corporate earnings growth. I will mention a few examples but save a deeper analysis for later articles. What was a modest retreat from globalization on political grounds can now be justified on supply chain grounds. This trend will likely be negative for revenue growth and margins overall, though some companies will buck the general trend. Additionally, extreme fiscal deficit spending makes a low-tax paradigm less sustainable in the long-run, which has negative ramifications for corporate net margins. Offsetting these negatives, however, companies could find more operating efficiencies if shutdowns normalize less travel and less expensive office space.
Today, I am adding two predictions: that the inflation rate will average below 2% for 2020 and that the 10-year yield will still be below 1% on 12/31.
Exhibit 2. Predictions Regarding The Economy
Regarding the market
My thesis for the equity markets has been that low risk-free rates will drive the market multiple higher, despite earnings estimates that continue to deteriorate. I expect the forward multiple on the S&P 500 will generally stay above 20x while risk-free rates stay low, and it would not surprise me to see the forward multiple approach 25x.
This leads me to predict that the S&P 500 will surpass its prior high by 6/30/21 and that S&P 500 earnings will exceed $170 in 2021.
Exhibit 3. Predictions Regarding The Market
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