In early March, I wrote a letter to clients of the firm to get across a very simple, but powerful concept that I wanted everyone to understand: The news will get worse, but its ability to shock us will diminish. Read: “The One Thing We Know For Sure” for more on this.
US stocks stopped falling in March 2009 approximately six months before unemployment peaked. It’s not that stock market participants knew for sure that unemployment would peak later that fall. It’s that the continually increasing unemployment rate was no longer a surprise. Everyone expected it. The shock value was gone. Stocks don’t trade based on “good” or “bad”, they trade based on better or worse: Is the news bad? Yes. Is it worse than expected? No. Stocks go up.
Here’s Brian Wesbury on the Q1 disaster, and the even worse Q2 economic numbers still to come – they will come as no surprise:
But the second quarter, which we’re already in, is going to be worse. How much worse? Put it this way: Since 1947, the worst quarter in our history was a 10% annualized drop in the first quarter of 1958, on the heels of the Asian Flu. In the current quarter, real GDP is likely to drop at about a 30% annual rate, rivaling declines last seen during the late-1945 wind-down from World War II as well as the Great Depression.
We also expect an unemployment rate that flirts with 20%, compared to highs of 10.0% in the aftermath of the Great Recession in 2009 and 10.8% at the end of the brutal 1981-82 recession.
The key for investors to remember is that none of this is going to shock anyone; the markets already know it’s going to be awful. Instead, investors need to focus on how quickly we are going to recover, which will depend on finding ways to carefully ease lockdowns, the virulence of the Coronavirus in the months ahead, the timeline for developing therapies, and, ultimately, the timeline for developing a vaccine.
You can get Brian’s full note at the link below, I never miss one: