U-shaped recoveries from recessions ‘never really happen’

The U.S. economy will come roaring back to life after the COVID-19 pandemic caused the deepest contraction of the post-World War II era, according to one Wall Street strategist.

Stay-at-home orders aimed at slowing the spread of COVID-19 eliminated nonessential travel, bringing the U.S. economy to a grinding halt and causing a record 20.5 million job losses in April.

“We will see a V-shaped recovery for two reasons – the historic steepness of the decline in activity, and the unprecedented policy response,” wrote Michael Wilson, chief U.S. equity strategist at Morgan Stanley.

The U.S. economy contracted by a seasonally adjusted annualized rate of 4.8 percent in the three months through March, according to an advanced release from the Commerce Department. The major Wall Street banks all expect the economy to shrink by at least 30 percent in the second quarter of the year.

To combat the economic weakness, the Federal Reserve announced open-ended asset purchases and several lending facilities designed to improve the flow of credit to those households and businesses most severely impacted by the virus. Additionally, Congress has passed several bills, extending trillions of dollars in aid.

Wilson says while most investors no longer think the stock market will retest its March lows, they remain skeptical of the rally and want to know “how high it really can trade given all the uncertainties we face in the recovery.”

He pointed investor sentiment at bearish levels typically seen when stocks are at 52-week lows rather than in the midst of a 30 percent rally and money market balances at record levels.

David Kostin, chief U.S. equity strategist at Goldman Sachs has noticed the same skepticism in his discussions with clients, noting “varying degrees of concern about how swiftly the market has rebounded” and uneasiness about current valuations and forward return potential.

Among the top concerns from Goldman clients is the narrow breadth, or number of stocks participating in the rally. Just five companies – Facebook, Amazon, Apple, Microsoft and Google – make up 21 percent of the S&P, the highest concentration in over 30 years, the firm said.

Both Wilson and Kostin have a yearend S&P 500 price target of 3,000, or 2 percent above where the index finished Friday, but warn there is likely to be a pullback before the index continues higher. Kostin says the S&P could fall 18 percent to 2,400 while Wilson is calling for a drop of as much as 10 percent.

As for the shape of the economic recovery, Wilson said most investors he speaks with are “in the ‘U’ camp.” However, he warns U-shaped recoveries from recessions “never really happen,” which is why he’s betting on a “V.”

Author: Jonathan Garber

Source: Fox Business: US economy to see V-shaped recovery: Morgan Stanley

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