The 2008 financial crisis economic aftermath was too heated; it was referred to as the Great Depression. Nonetheless, now we are in the wake of the coronavirus catastrophe. Thus, investors need to brace for the Great Depression, which might be even uglier than the downturn, which happened a decade ago. David Rosenberg is an economist. All the abovementioned is a take away for his analysis. Rosenberg said that it is often considered as a perma-bear. Nevertheless, that is not entirely fear. He has had an optimistic spurt.
That just is not one of them.
Published by his firm, Rosenberg Research, in the “base case” the United States economy, the economy reopens in May. It will be a staggered approach around regions and industries. There are setbacks periodically in terms of COVID-19 case counts. It is enough to make people less confident and comfortable concerning the spending; then they did before the crisis. Moreover, in this forecast, a vaccine is not developed. Nevertheless, a treatment that alleviates the worst respiratory symptoms is designed within the next six months. That is what David Rosenberg writes.
There comes the question: What does that mean for the financial markets and economy?
In the second quarter, there is a 30% contraction in GDP (gross domestic product). Moreover, there negative year-over-year consumer price growth for five quarters. Nonetheless, there is a rate of unemployment of 14.2% by the end of 2020. It averages 13% throughout 2021.
Each quarter, the ten-year Treasury yield TMUBMUSD10Y, 0.643% is sinking lower and lower, to 31 basis points by the fourth quarter. It is averaging 18 basis points throughout 2021. Moreover, as bond prices rise, yields fall.
Investors in high-yield debt are running for the doors. They leave those bonds more than 700 basis points expensive than Treasurys at the end of the year.
In the second quarter, stocks are hitting the bottom. Thus, the S&P 500 SPX, 1.39% is at 2000, then start a slow recovery. Nevertheless, it is meager: the index is averaging only 2,600 throughout 2021. To interpret it in another way, Rosenberg is assuming that in the coming month’s stocks will sink 30%. Then they will spend most of the next 18 months grinding higher to valuations about 10% lower than today’s levels.
Rosenberg is laying out a “best case,” which is depending on treatment or vaccine emerging in the next 6 or 12 months. Moreover, that outlook is also including for the next two years, and the unemployment rate is averaging about 9%. Keeping by that scenario, a stock-market will bottom of 2,500 for the S&P 500 in the second quarter, and a cyclical low of 29 points of the basis for the 10-year note in 2021.
The worst-case scenario is bleak. It involves no treatment, no vaccine, and a second wave coronavirus outbreak next winter.
The second wave will severely sap household and business confidence. Thus, the jobless rate hits 20% in that outlook. It is averaging 17.5% through 2021.
Outright deflation is taking hold. Rosenberg writes to think about what years of no power of pricing are going to those corporate flows of cash in the future.
Let’s see what the future will bring for the United States.
- Trading Instrument