The recession that struck the US economy in the wake of the coronavirus crisis is already over, strategists at ClearBridge Investments believe.
This is according to the Legg Mason affiliate’s ‘Recovery Dashboard’, which analyses nine variables to help identify economic conditions and categorises them with a traffic stop metaphor (with red meaning recessionary, yellow improvement and green expansion)
These nine variables are split into three sub-groups: consumer confidence, business confidence and investor sentiment reflect ‘confidence’; housing starts, initial jobless claims and the Philly Fed Survey (or a regional index measuring changes in US business growth) show economic conditions; and credit spreads, Fed policy and financial conditions cover the financial factors.
Source: ClearBridge Investments
Jeffrey Schulze, investment strategist at ClearBridge Investments, said: “You can see that the entire progression happened over the second quarter. All the way to the right, we had a recessionary red in April, then we had a yellow improvement in May and then finally in June we moved to a green expansion.”
This is the quickest progression through the three colour stages in the dashboard’s history, he added.
“The market usually bottoms before the end of the recession and on average we’ve gone green is one month after the market troughed. Now thinking about what’s happened here recently then there’s no doubt that the recession ended sometime in May or June in the second quarter,” Schulze said.
“It was a very quick recession.”
Schulze said that on average the dashboard turns green one month prior to the recession ending. But as nothing else with coronavirus has been average, this wasn’t the case here where the recession ended three months after the market trough in March.
This was because “a normal recessionary type of environment didn’t play out”, owing to the totally unprecedented nature of a global pandemic closing global economies and triggering mammoth amounts of monetary and fiscal policy.
Schulze said in the US’ case this recession was a “once in a lifetime opportunity” for policymakers.
“Not only did they know when the recession was happening, but they knew the magnitude of the recession because the economy shut down,” he explained. “Policymakers also had something which they didn’t have last recession, which is political cover.”
The strategist noted that during the 2008 financial crisis, it was more difficult get political will behind bailing out Wall Street banks. “They did it anyway because it was going to see off the next Depression,” he said. “But nonetheless it took stimulus longer to get into the economy and the stimulus package probably wasn’t as big as it could’ve been.”
Looking at the Federal Reserve and other central banks’ interventions in the coronavirus crisis shows support this time around was fast, aggressive and on an unprecedently large scale.
John Bellows, portfolio manager for Western Asset Management, said: “What the Fed did in March, they were buying $75bn worth of treasuries every day. It was just a tremendous intervention.
“To put that into perspective, in previous rounds of QE [quantitative easing] they were buying $40bn per month. So what they were buying one day in late March, they were buying double what they bought in say January 2009. It was a very, very aggressive intervention and it worked.”
But this isn’t all to say that the mechanics of a recession have permanently changed, Schulze added. Rather it highlights the truly anomalous nature of coronavirus and the fallout it has caused.
But what does this recovery hold for the US, a country which is by no means out of the throes of uncertainty despite its rallying S&P 500?
With rising coronavirus cases and high unemployment rates, Schulze said: “Now the question that I’m contemplating is ‘what happens when the unstoppable force meets an immovable object?’
“And the proverbial unstoppable force in this case is the tenacious determination of our policymakers, the Fed and Congress, and the immovable object is the US economy, which is extraordinarily fragile and facing several headwinds like rising coronavirus infections, rising bankruptcies and a hesitant consumer.”
Schulze and Bellows agree that the Fed will continue in this easing trajectory while some businesses have to remain closed and unemployment sits at a high 11.1 per cent, according to the US Bureau of Labor Statistics.
Schulze expects the timeline for the Fed exiting this round of monetary stimulus to be as late as 2022-23.
He added: “The Fed isn’t waving the flag saying that they’ve won this battle. They know that the economy is still very weak and it continues to be weak.”
Bellows said he expects the Fed to keep interest rates low and carry out more bond purchases: “It means that the rate hike cycle is way far away and I think that we’re going to continue to see a lot of accommodation going forward.”
He added: “As you think through the different scenarios, obviously if the economy turns down and disappoints the Fed is going to stay easing.
“But then an important point is if the economy surprises and turns better, there’s a chance that the Fed still stays easing even in that scenario because they’re trying to drive unemployment down and trying to drive inflation higher.
“So I think that it could be longer: I think that they could be at this for a very long time, especially given how far away they are from their mandates right now.”