It’s Official – The Economic Recovery Ended

May 7, 2020

This week marked the end of an era, the growth era. In fact, the longest economic recovery of America’s history era. The recovery was officially pronounced dead with this week’s release of a GDP decline of -4.8% in the first quarter.

This was not unexpected at all. We’ve been talking about the certainty around this for a couple of months now. The challenge that comes with these numbers is they remind us of where we have been, not where we are going. We know GDP was slow in the first quarter because March was terrible. We also know it’s getting worse in the 2nd quarter because most of the U.S. has been shut down for quite some time. But nonetheless, these numbers make the headlines because it is fresh data, albeit backward-looking.

So, what if we look ahead instead? Well, here are some numbers about projected company earnings:

Source: Axios Markets 5/4/2020

And some more projections about the economy:

Keep in mind, that second quarter drop in GDP in the table above comes out to an annualized decline of -39.6%, which is quite massive! What does this all say? As referenced in the “It’s All Relative” Wealth Watch from a couple of weeks ago, we can all glean from this that sunshine is not what’s predicted by the market yet. In fact, these backward-looking economic reports and earnings reports will very likely be worse before they get better. What’s more? We aren’t predicted to have a sharp economic snapback or V-shaped recovery, that just puts everything in the economy back to where it was earlier this year.  It will take some time. Unemployment will remain high and GDP will still be climbing out of a hole. You can see that in the economic projections above.

But from a stock market perspective, that’s actually OK. Look at something like a P/E ratio (price-to-earnings). This is a measurement of how much you pay for a dollar of company earnings. Historically for the S&P 500, you pay close to $16 for a dollar of earnings. What does that mean? Well, another way to look at it is you pay for 16 years of earnings. So, the price of a stock is not measured by how much earnings will be this month, this quarter, or this year alone. Sure, it’s a factor, but the future well beyond the next year matters as well to the price of a stock, or market, today.

There’s a saying about investing as it relates to driving. In short, you have a windshield and a rearview mirror. You should use them proportionate to their size. While big reported numbers are tempting to get distracted by, these feelings must be overcome to keep on your journey to the ultimate destination.

The S&P 500 Index includes a representative sample of the largest 500 companies in the U.S.