- Fidelity's Asset Allocation Research Team (AART) believes the US is entering an economic recession.
- The financial system enters this crisis in a healthier position than during 2008-2009.
- Still, the continued spread of the virus and the growing scope of the clampdown on public activity suggest it is too soon to forecast the length and magnitude of the contraction.
- Historically, during recessions, more defensive assets such as high-quality bonds tend to outperform more economically sensitive assets such as stocks.
- Equities have already adjusted significantly.
- Despite the turmoil, it remains important to focus on your long-term goals and asset mix.
The unprecedented coronavirus (COVID-19) pandemic continues to be a tragedy for many thousands of people around the world. The human impact is staggering. To slow the spread of the virus, governments around the world have enacted travel restrictions, schools have closed, large gatherings have been canceled, and in some cases, whole cities have been locked down. More such measures may be necessary to get through this health crisis.
These efforts have and will continue to dramatically alter daily routines and impact the livelihoods of millions. Global manufacturing supply chains have been interrupted, affecting the ability of companies to produce and sell their goods. Companies and consumers alike are spending less on travel, restaurants, shopping, and other discretionary activities.
As a result, stock markets have moved sharply lower, driven by uncertainty around the outlook for corporate earnings growth. As we noted in recent commentaries, we expect that this human health concern will reduce business and consumer demand in the near term.
The US economy has weakened
Given this outlook of weaker demand, Fidelity's Asset Allocation Research Team (AART) believes the US economy is at the onset of the recession phase of the business cycle. AART expects to see the US economy contract in the near term.
We know this is unsettling for most investors. However, today's anticipated economic contraction differs significantly from what took place over a decade ago during the global financial crisis.
The financial system enters this situation in a healthier position than during 2008–2009. For example, banks have larger capital cushions to better weather a contraction and provide credit to businesses and consumers. This can alleviate pressure on businesses to cut jobs rapidly and can aid an eventual economic recovery.
Finally, since the last recession, central banks around the world learned important lessons on how to manage recessions more effectively. Tools like quantitative easing (the injection of money into the financial system by central banks) proved effective at helping the global economy recover back then.
Today, central banks can use these tools with the benefit of experience and are already taking proactive steps to help manage the economic challenges stemming from the pandemic. This is highlighted by the Fed's recent decision to cut interest rates and increase the size of bond-buying programs to help ensure that markets operate efficiently.
Meanwhile, the federal government is moving to provide significant fiscal stimulus.
The White House is seeking an unprecedented relief package and Congress is working to hammer out the details on several different bills.
When will this end?
The depth and length of this recession are highly uncertain given the many unknowns surrounding the spread of the coronavirus. This unpredictability has made it very challenging for investors to estimate the outlook for corporate profit growth. That uncertainty has been a key driver of recent market turbulence.
But we've experienced uncertain times before. And history shows that the stock market has tended to recover from downturns and spent much more time in expansion phases of the market than in contraction.
Historically during the recession phase of the business cycle, more defensive assets such as high-quality bonds tend to outperform more economically sensitive assets such as stocks. But that does not mean investors should bail out of stocks altogether. The stock market will eventually recover, and you want to be in a position to capture that growth.
History does not always repeat itself—and this global pandemic is unprecedented. But it's worth noting that in previous recessions, some of the strongest market returns have often occurred when news headlines seemed the bleakest.
Also, historically, market rebounds have tended to come quickly. Not being invested might mean missing the rebound. As you can see below, missing out on the best market days can undermine your long-term investing success and the ability to achieve your personal goals.
In the current situation, it's our belief that the faster the spread of the virus is mitigated, the better we can understand the drivers and speed of an eventual economic improvement. That's why we're tapping into the expertise of our Fidelity economic team as well as our deep pool of internal and external investment research.
On the economic front, we are carefully analyzing all economic data, but particularly weekly jobless claims, corporate earnings, and the potential impact of central bank and government actions.
On the health front, we are consulting with medical experts to closely track the rate of change of new COVID-19 cases in the US. We are also looking for signs of economic improvement in hard-hit regions, like China, where the growth of the virus has slowed. Among the indicators we have been following: traffic congestion, railway passenger trips, and electricity production.