What Do the Q1 Numbers Tell Us About the Rest of the Year?

THE FIRST QUARTER OF 2020, launched amid economic growth, broad optimism and low unemployment, ended on Tuesday, having set records that few could have foreseen. “The Dow Jones Industrial Average and the S&P 500 finished their worst quarter ever, down 23% and 20%, respectively,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. 

With the virus continuing to spread and nearly 10 million Americans filing jobless claims in the past two weeks alone, it’s possible a full recovery may not come about until the end of 2021. “To put it bluntly, in April and possibly May the financial markets and economy are likely to see some of the sharpest downturns in history as the shutdown takes full effect,” Hyzy says. But, he adds, “It’s important to remember what’s driving the downturn. This is a health-care crisis; before it began, the fundamentals of our economy were strong.”

What could the next three quarters bring?
With travel curtailed and millions of Americans confined to their homes, it’s no surprise that spending on airlines, hotels and restaurant visits has plunged. “But we’re also beginning to see much lower spending on other types of discretionary purchases, things like clothing and furniture,” says Michelle Meyer, head of U.S. Economics, BofA Global Research. “Consumers are much more concerned right now about their finances and health, and much less willing to spend.”

As a result, U.S. GDP is likely to shrink by 30% during the second quarter on an annualized basis, Meyer says. GDP will likely contract by a cumulative 10.4% over the first nine months and then recover somewhat in the fourth quarter to finish full-year 2020 with GDP growth of -6%.  “That would be the steepest recession on record and nearly five times more severe than the average of all recessions since World War II.”

What are the longer-term prospects?
While we’re undoubtedly looking at an arduous recovery ahead, the trillions of dollars in stimulus programs by the Federal Reserve and Congress have prevented a bad situation from becoming much worse, says Savita Subramanian, head of U.S. Equity & Quantitative Strategy and Global ESG Research for BofA Global Research. “We expect companies will work out their bad news during 2020,” she says. And while earnings aren’t likely to return to pre-coronavirus levels until 2022, “we’re anticipating earnings growth in the range of 25% to 35% for 2021. That’s a pretty strong recovery.”

What can investors do now?
As the economy and markets begin to bottom out in the weeks ahead, investors who avoid panic selling may find opportunities to rebalance their portfolios and invest towards an eventual recovery, Hyzy says. Still, everything depends on answers to the question the whole world is asking: When will the health crisis ease? “Science is what gets us back to a new normal,” he adds.

For more insights, read “Whatever It Takes: The U.S. Policy Response to COVID-19,” from the Chief Investment Office, and tune in to the Daily CIO Audiocast.